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How ACES became ACES matters

Roger Marks
OPINION: It matters that the oil taxation regime known as ACES was born from a poisoned era in Alaska politics. State of Alaska photo

In August 2006 the Alaska Legislature passed the Petroleum Profits Tax (PPT) oil production tax revision by a three-to-one margin. It was a sizable tax increase, tripling revenues over the previous Economic Limit Factor (ELF) system, including for the first time a progressivity element.

In September 2006 a sad episode in Alaska began. The FBI raided six legislative offices, revealing the existence of a federal probe into public corruption. The investigation was prompted by VECO’s bribery involvement in trying to shape the PPT legislation. However, the PPT that passed was not what VECO wanted. VECO had wanted a lower tax rate than what passed, with no progressivity.

In November 2006 Sarah Palin was elected governor. In spring 2007 three indictments came out of the VECO scandal. Palin decided the PPT process from the prior year was tainted and wanted new legislation.

In October 2007, after much work within the administration to design a competitive and efficient tax structure, a revised oil tax bill was submitted, Alaska’s Clear and Equitable Share (the original ACES). The original ACES bill was a modest increase over PPT: a slightly higher rate, progressivity starting at a lower price, but a lower progressivity slope. At higher prices, the original ACES would have brought in less money than PPT.

As ACES was going through the Legislature in the fall of 2007, much was unclear about the extent of the scandal. By early November 2007, juries had returned guilty verdicts against two legislators charged with VECO-related corruption. There were many rumors that other legislators, and perhaps the oil companies, might get charged. For example, a published report (a blog post from a KTUU reporter) suggested that 26 total people would be indicted. The public was enraged.

That kind of talk created anxiety for a number of legislators. The atmosphere was quite “McCarthyistic,” the implication being that if you did not support a large tax increase, you were corrupt. Paranoia spread as the bill went from committee to committee, and the tax rates kept escalating. The tax structure that became the final ACES bill passed the legislature on November 15.

The progressivity structure in ACES imposed very high taxes at high prices. Given the upstream costs at that time, at $110 per barrel the marginal tax rate (the percentage of a price increase that goes to government) exceeded 90 percent. Yet the Legislature never looked at ACES’ impact at prices above $80. Prices were $70 at the time owing to Middle East tensions. Prices the previous year had been $60, and the long-run forecast was $45. But oil prices rose precipitously in 2008.

As a result, ACES imposed some of the highest tax rates in the world at high prices, eliminating upside price potential for the producers (the ability to make more money when prices are high). Upside potential is important because it offsets downside risk, and shapes investment decisions. This reduced Alaska’s competiveness, and Alaska paid the price.

Since 2007 oil prices went from a $60 world to a $120 one. Investment should have soared here. Instead, upstream expenditures increased at a rate only one-quarter of what occurred worldwide. As a result, in 2013 the outlook for production under ACES in 10 years was only 300,000 barrels per day.

ACES passed by the same three-to-one margin that PPT did a year earlier, with the legislature 80 percent the same people. The difference between PPT and ACES can be characterized as displaced VECO frenzy and vengeance.

FBI surveillance was exhaustive. At the end of the day four legislators were found guilty of felonies related to the VECO scandal: 56 out of 60 were not. Most likely those four did not affect the outcome in 2006; they were not the most influential lawmakers. There was no evidence of taxpayer (oil company) culpability.

The hysteria of the time gave us ACES: a fluke of history. Afterward, higher oil taxes remained as a misdirected punitive relic of that unfortunate time. SB 21 will bring in more revenues than PPT or the original ACES. Sustaining the reactionary rage that was ACES may only be punishing ourselves.

Roger Marks is a petroleum economist in private practice in Anchorage. His clients have included federal, state, and local governments, independent petroleum explorer/producers, pipeline companies, the University of Alaska, and research analysts engaged in international comparative petroleum fiscal regimes. Since 2009, he has been a consultant to the Alaska Legislature on oil and gas taxation issues. Between 1983 and 2008, he was a senior petroleum economist with the Tax Division of the Alaska Department of Revenue, specializing in petroleum taxation policy.

The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.