Politics

Conflict lurks over property taxes for proposed Alaska gas line

JUNEAU -- The North Slope Borough has become fabulously wealthy from taxes on the oil industry and its massive Prudhoe Bay infrastructure.

In addition to subsidies of thousands of dollars per resident for the costs of water, sewer, lights and heat, the nation's northernmost municipality even has its own permanent fund.

At about half a billion dollars, the borough's permanent fund is equal to the size of the Alaska Permanent Fund on a relative, per-person basis.

But while a decline in the price of oil is hitting the state's budget hard and threatening to drive Alaska into a recession, the North Slope Borough is still sitting pretty. That's because the borough gets its revenue from property taxes on $18 billion worth of industry infrastructure there, not on taxes on income or profits or from the sale of oil itself, as the state does.

But all that property tax wealth flowing to the North Slope Borough and the city of Valdez, by far the two largest recipients, doesn't always sit well with those who don't share in the money and who are trying to balance their own budgets.

"We were tagged with that all the time," said Bert Cottle, former Valdez mayor, about the reaction when his city's representatives visited the Capitol in Juneau on lobbying trips.

"They'd say 'you're the little rich kids from Valdez, or from the North Slope Borough, you don't need any money,'" he said.

ADVERTISEMENT

Last year, the companies that own the trans-Alaska pipeline and the North Slope oil infrastructure paid $545 million in property taxes, with the state getting only $128 million of that, mostly on the areas of the pipeline where no municipality collects tax.

A $50 billion natural gas pipeline and export project could create a new and even bigger property tax windfall, but there's a growing view that that money should be shared much differently than the property taxes on oil.

"That revenue should go into the state treasury," said Sen. Bert Stedman, R-Sitka, who has no oil production infrastructure in his Southeast district.

State government thinks so as well, and when former Gov. Sean Parnell signed a "heads of agreement" with the state's big oil producers, who also hold the rights to most of the state's natural gas, it called for using a "payment in lieu of taxes," or PILT, to tax the property value of the gas pipeline.

Though the details have yet to be worked out, the PILT system was endorsed by the Alaska Legislature when it passed Senate Bill 138, which is guiding the development of the AKLNG project, the state's big gas pipeline and liquefied natural gas effort.

If that pipeline is built, the companies will pay their natural gas pipeline project property tax to the state, instead of local municipalities, at about current property tax rates.

North Slope Borough Mayor Charlotte Brower declined to comment on that arrangement, but for a natural gas pipeline and LNG export project, about half the value would be located in the Kenai Peninsula Borough, where the LNG plant itself would likely cost $25 billion.

"I think a PILT structure makes good sense," said Mike Navarre, borough mayor in Kenai.

Navarre said Kenai is not seeking to benefit disproportionately from the project, and wants to do whatever it can to make it succeed.

"The PILT that's put in place certainly should be shared with the state, because the communities around the state ought to benefit from the project," he said.

But Kenai wants its expenses covered, such as with "impact" payments that may cover costs of such things as schools and roads that might be needed during construction, even before traditional property tax payments would begin coming.

State Revenue Commissioner Randy Hoffbeck has been negotiating a PILT deal with industry representatives, and they wanted a PILT deal as well, in part to avoid the yearslong battles over the value of TAPS.

"This is something these producers asked for," Hoffbeck said.

AKLNG project spokesperson Kim Fox said the project itself didn't have a position on property taxes, but that its individual company owners may have their own positions.

"Property tax considerations are always weighed into investment decision for our industry. That said, we do not know where the state and municipalities have landed on taxes (or PILT) and it's premature to comment," Fox said.

Hoffbeck said the companies did not seek significant property tax concessions in the talks, but some minor ones are built into the negotiated deal, including taxes while under construction.

"There's a little bit of a break during construction," Hoffbeck said. "That's where things are most critical for the economics of the project because there's absolutely no cash coming in and there's pure cash going out," he said.

ADVERTISEMENT

Because natural gas is much less profitable than oil, the Alaska LNG project can't afford to pay the same rates as the oil infrastructure does, said Larry Persily, formerly the federal gas line coordinator and now an adviser to the Kenai Peninsula Borough.

"You couldn't charge this project a billion dollars a year in property taxes and still be competitive in a tight global (LNG) market," he said.

The benefit to the project and the state from negotiating a PILT up front should not be underestimated, Cottle said

"Trust me, having been in lawsuits numerous times with the owner companies over the value of the trans-Alaska pipeline, if there's a way to prevent that, that would be great," he said.

The taxes under the PILT would be paid on a five-year average of the estimated value, meaning that there would also be reductions in the project's first four years as well.

Hoffbeck said the proposed PILT system will be discussed next week with the Municipal Advisory Gas Project Review Board, which was created by Senate Bill 138 with representation from communities both on and off the pipeline route.

The final property tax agreement will have to be approved by the Alaska Legislature. That's something Gov. Walker had said he hoped could be done in a fall special session, but which is now looking like it may instead be considered during next year's regular session.

The real battle appears to be not over the amount of the PILT payment, but how its proceeds are divided up by the state.

ADVERTISEMENT

Hoffbeck called that a largely political question.

"We'll make recommendations, but my assumption is that will be a fairly robust discussion at the Legislature," Hoffbeck said.

Cottle, the former Valdez mayor, now serves as mayor of Wasilla. These days he's seeking to have that property tax largesse shared with communities, but he wants it done with as little involvement from the Legislature as possible.

Best, he said, would be a system where cities get "a check that is sent to you without having to go down and lobby, and hope that your side is in power or that you are favorites of whoever has power," Cottle said.

But communities such as Kenai with actual costs are asking for extra to cover those costs. Aid tied to direct impact would also benefit areas such as the Denali Borough, which will have pipeline infrastructure but no property taxes because the borough doesn't impose them, he said.

ADVERTISEMENT