Dingman: Unknowns mean Alaskans will vote no on oil tax referendum

Mike Dingman

On Aug. 19, we will have a chance to vote on an issue we absolutely do not fully comprehend. That lack of understanding will likely be the most decisive factor in how the vote turns out.

Chances are you think you know more about it than you do. We've been bombarded with advertisements, radio talk show rants, bullet points from both sides and, seemingly, thousands of newspaper opinion columns on the issue.

However, you probably don't really understand Alaska's oil tax structure.

Sure, we all know what we think are the basics. We know all about Sarah Palin's "fair share," that Alaska is an "owner state" and that oil production is declining at a record pace.

But do we really understand all of that?

Even many of the self-appointed "experts" don't truly understand all of the specifics of Alaska's oil tax structure. It's fairly complicated and recent changes have made it even more complicated.

I'm no expert on oil taxes. That's very much my point. I stay involved, read up on the issues, watch legislative sessions, talk to legislators and experts, and I'm still far from well-versed on the ins and outs of Alaska's oil tax structure.

That being said, lets discuss what we do know.

Alaska is an owner state. This concept comes from the Alaska Constitution Article 8 -- Natural Resources. The constitution states in Section 1, "It is the policy of the State to encourage the settlement of its land and the development of its resources by making them available for maximum use consistent with the public interest."

This means that the people of Alaska are the ones who benefit from the natural resources of the state, and that the state is obligated to ensure they are managed to provide the maximum benefit to the people of Alaska. This sentiment has caused some legislators considerable consternation over the last decade of debating oil tax structures.

Alaska taxes oil itself in two ways. We collect a production tax and a royalty, since we are owners. The state can choose to take its oil in kind or in value, depending on what's determined to be the best interest of the state. When the state takes oil in kind, it sells it, and the sale must make at least as much as it would if it took the royalty in value. When the state takes royalty in value instead, the producers sell the state's share along with their own, and pay the state the value of its share.

The royalty, technically a contractual agreement that is part of an oil lease and not exactly a tax, is usually a straightforward matter. The production tax -- well, that's a little more complicated. To complicate things even further, the royalty rate in some cases can affect the production tax rate.

The quick history you've probably heard. Alaska had the ELF -- which stood for Economic Limit Factor and was meant to protect smaller fields by keeping the taxes there low and keeping higher taxes on the larger fields that had investments largely paid back and had less technically challenging operations.

In 2006, the oil tax debate really began in earnest when then-Gov. Frank Murkowski switched to the PPT oil tax structure, which switched from a gross tax to a net profits tax. It also introduced the idea of progressivity, which changes the tax rate based on a formula that involves a lot of things including the price of oil.

In November 2006, Sarah Palin was elected governor, and with her came a whole new tax structure.

"Alaska's Clear and Equitable Share," or ACES, included an aggressive progressivity structure that brought in a lot of tax revenue for the state when oil prices surprised many and spiked above $140 per barrel.

Last year, Sean Parnell's attempts to change the oil tax structure finally paid off. Among other changes, Senate Bill 21, dubbed the "More Alaska Production Act," raised the base tax rate in ACES from 25 percent to 35 percent but capped progressivity at that same level, lowering taxes overall for the oil companies at some price points. That, supporters say, along with credits for new oil production and other, smaller changes, will spur new production, while the detractors say that we are simply giving money away to the producers in the form of lower tax rates and not getting any assurances in return.

This new tax structure is what Proposition 1 organizers hope to repeal in August's primary election.

The Democrats and others have famously called this a "$2 billion giveaway." UAA emeritus economist Scott Goldsmith said last month that this giveaway does not exist. He stated that the number is likely closer to $88 million. Either way, on either side the numbers are all projections and best guesses. The taxes will be paid and the numbers will come in -- and even then, both sides will be able to claim victory because the tax structure is so complicated that people just don't understand it.

So, one thing remains clear -- the process of collecting taxes on Alaska's oil is very complicated. It's a process that most Alaskans don't really understand and, honestly, probably don't care that much about.

I believe that Alaskans will vote no on Proposition 1, but not because they have studied the issue and believe that the progressivity formula is flawed or because the new tax structure will bring new development.

When they step in that ballot box and see that proposition sitting in front of them, it will be loud and clear that they do not understand the issue. And when the issue is confusing, people generally vote no. After all of the studies, consultations, advertisements and forums, Alaskans will make their decision based on a lack of understanding of a complex issue.

Mike Dingman is a fifth-generation Alaskan born and raised in Anchorage. He is a former UAA student body president and has worked, studied and volunteered in Alaska politics.

Mike Dingman