Voices

Tim Bradner: Without SB 21, state budget woes would be worse

It's been months since Alaskans voted to retain the new oil production tax system, but we still hear grumbling that this was a big giveaway to industry.

Time to pound a stake into this zombie.

Our state government is facing staggering reductions in revenue -- about 50 percent from last year -- because crude oil prices have dropped through the floor. Our state finances about 90 percent of its budget with oil money. We're now looking at a deficit of $3.5 billion but that could grow by the end of the fiscal year on June 30.

Next year looks to have a similar deficit. Luckily, we have big savings accounts to ride us through this.

But the fact is that the deficit would have been a lot worse had the Legislature not made the oil tax change. Sen. Peter Micciche, R-Kenai, says that had the old tax remained on the books there would be $1 billion less revenue last year and this year.

This occurs because of the way the tax laws are structured. The new tax has a minimum "floor" tax rate that kicks in when oil prices drop, as they have. The old tax had a floor too, but there was a hole in it. The former law allowed development incentive tax credits given the industry to be applied before the floor rate was calculated, which made the minimum tax meaningless.

The new tax does not allow the tax credits to be part of the calculation, so it is more effective.

ADVERTISEMENT

Generally, the structure of both the old and new taxes, which are based on companies' net profits from their Alaska production, are progressive in that they tend to lessen the tax burden on companies at lower prices and hike the tax at higher prices. Legislators did that to encourage the companies to continue investing in a low price cycle but to share more of the gain with the companies when prices rise.

However, the particular design of the former tax was that there was a steeper slope on the tax rate when prices dropped than under the new tax. At $80 per barrel, for example, the tax rate was higher under the new tax than under the former tax.

Under $80 per barrel, however, the minimum tax rate kicks in as a mechanism to protect state revenues in a serious oil price slump. This is what has happened now, and the minimum tax under the new tax is much more effective.

We're well served now by the new tax and we're lucky to have put it in place before the oil price slide really started.

This doesn't mean we don't have problems with the oil tax law, however. Some tinkering in the future may be merited at some point.

One area worth a look is the complex web of oil incentive tax credits that have grown over the years. This began years ago as a relatively modest credit against certain exploration expenses. It was expanded in 2006 with a flat 20 percent credit against oil production tax owed for capital investments made. The idea was to encourage oil producers to invest their profits back in the state.

A good idea, but then things got complicated, which usually happens when we start tinkering with tax codes.

One new twist after another was added to the point that we now pay up to 60 and 70 percent of the cost of exploration wells, with the state actually writing a check to the explorers in many cases. This year we are writing checks for $625 million to these companies. Next year this will increase to $700 million.

Also, producer companies, usually large firms, are using tax credits to reduce their tax bill by $750 million this year. Next year this will drop to $510 million, according to the Department of Revenue. Still, these total to $1.37 billion this year and $1.21 billion next year.

The net result is that our state treasury is left with production tax revenue of $523.6 million this year and $308.4 million next year.

Gov. Bill Walker has pointed this out as an area of concern but the governor also said he has no plans, this year at least, to tinker with the oil tax statute. He and state legislators have enough on their hands with budget cuts and other issues, like a gas pipeline. There's no appetite to reopen the oil tax can of worms.

But this has to be looked at sometime. The policy intention is that these credits encourage new exploration and development, and they do seem to do that. Cook Inlet, for example, has seen a turnaround in oil and gas production, which the credits have helped, and this helps keep our energy supply secure.

It's always an unknown as to how much of this development might have occurred anyway, however. When oil prices were at $110 per barrel that price seemed incentive enough for Cook Inlet oil exploration. Likewise, natural gas prices are rising, and that's an incentive for gas development. I believe the commodity price is a far more efficient incentive than a tax credit.

If there's a policy to help small companies there may be better ways to encourage them than tax credits. Consultants to the Legislature have suggested that direct state investment may be a better way of doing it. In fact, we're doing this already, so the Rubicon has been crossed.

The Alaska Industrial Development and Export Authority, the state development corporation, has now invested with a small independent company to facilitate a small North Slope field development. The authority is similarly looking at investing to help develop a Cook Inlet gas field.

These are structured as temporary deals. AIDEA gets the project going and then sells out to the partner. Exactly this was done with an AIDEA investment in a jack-up rig in Cook Inlet. AIDEA sold its partnership at a profit.

AIDEA won't be as lucky with every such deal, but it's a model that seems to work and it's better a bet than tax credits, I think. The state facilitates the development, hopefully making a profit, and still gets new royalty and tax income.

ADVERTISEMENT