During legislative deliberations, advocates of the Senate Bill 21 oil tax consistently used North Dakota as an example of the ideal tax regime that Alaska should emulate. We were told that because of North Dakota’s tax structure they are more competitive than Alaska resulting in huge increases in industry investment and rapid increases in production. If Alaska would just lower its tax to be more aligned with North Dakota, we would also benefit from rapid increases in investment and production.
However the oil boom in North Dakota, along with Texas, is a result of the advancement of fracking technology that releases hydrocarbons previously trapped in shale rock and the private land ownership of the surface and subsurface. This boom is not tax-driven.
In 1830, Massachusetts Supreme Court Justice Samuel Putnam established the Prudent Man Rule, a legal foundation for professional financial management that has been a guiding fiduciary principle in our country for nearly 200 years. Stemming from the case Harvard College v. Amory, Justice Putnam’s rule states, “All that can be required of a trustee to invest is that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.”
The state of North Dakota levies a combined production and extraction tax of 11.5 percent on the gross value of oil at the wellhead. In addition, the individual landowner, as the owner of the subsurface resource, negotiates a private royalty payment that averages 20 percent on the gross value of oil. But in Alaska, the citizens of the state own the subsurface resources collectively and the Alaska State Legislature has the constitutionally mandated fiduciary duty to set a fair sale price for public resources.
Referring back to almost 200 years of Judge Putnam’s Rule, I assure you that the prudent North Dakota farmer would never intentionally sell his hydrocarbon resources for less than the going rate, nor should Alaskans as owners of Prudhoe and Kuparuk - the two largest conventional oil fields in North America.
So how does Alaska’s net tax and royalty regimes compare to North Dakota’s gross tax and royalty system assuming the same number of barrels produced? In fiscal year 2013 (the last full year under the ACES oil tax), Alaska’s tax and royalty generated $763 million more than we would have under North Dakota’s tax and private royalty regime. Now that ACES has been replaced with SB 21, using fiscal year 2015 forecasts (the first full year under the new SB 21 oil tax), Alaska’s tax and royalty will bring in $1.5 billion less than if we had North Dakota’s tax and royalty.
Given that the goal of SB 21 was to make Alaska a more competitive place to invest by lowering our tax rate to something comparable to North Dakota, we missed the mark by $1.5 billion.
In addition, North Dakota hasn’t provided fiscal incentives for the oil industry since 2004, whereas the per barrel credit in SB 21 is projected to average $6 per barrel produced at a cost to Alaskans of $953 million in fiscal year 2015 alone. That equals an effective tax rate of 21.9 percent, well below the 35 percent base tax rate that supporters of SB 21 want you to believe is what the industry pays. Furthermore, the fact that no incremental year after year sustained production increase is expected is a substantial deviation from what the SB 21 supporters were promised.
The prudent Alaskan man or woman would never accept the terms in SB 21 in setting the sale price of their subsurface oil. It’s up to you, the owner, to go to the polls on Aug. 19 and tell your government whether or not you believe we’re selling your oil for a fair price. A no vote on Ballot Measure 1 will retain the SB 21 oil tax, and a yes vote will repeal SB 21.
As for me, I am voting yes.
State Sen. Bert Stedman, R-Sitka, is a past chairman and current executive committee member of the Energy Council and a current member of the National Petroleum Council.
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.