House Bill 110, Gov. Sean Parnell's oil tax legislation, proposes something rare in the history of Alaska: purposefully collecting less revenue from the oil industry.
It's not a secret.
The Parnell Administration estimates that HB 110 would reduce revenue by $5 billion over the next five years. Like any forecast, it's uncertain. Some lawmakers believe it's too low. Oil prices could erase or exacerbate the reduction. Plus, the forecast only looks out five years, and the Parnell Administration argues that a short-term loss in revenue will be recovered through jobs, investment and even more revenue down the road.
Nevertheless, it's a milestone. In its first 53 years as a state, Alaska never intentionally reduced oil revenues this much. Regardless of the outcome this year, the fact that HB 110 exists supports a hypothesis about the pattern of Alaska oil taxes put forward in 2008 by Matthew Berman, an economics professor at the Institute of Social and Economic Research. His hypothesis: rather than the need for revenue or the price of oil, the most consistent explanation for the way the fiscal regime in Alaska has changed over the past 30 years is the steadily decreasing "distance" between the state and the industry.
"Distance" is an academic term. It measures how much a government negotiates with the industry when it crafts a fiscal regime. To oversimplify things: In high distance, the state sets a tax. In low distance, the state and the industry negotiate a tax. In medium distance, the industry helps the state comes up with a tax that might be amended by the Legislature.
In the 34 years since oil began flowing from the North Slope, the distance between the state of Alaska and the oil industry has gradually decreased, Berman argues.
Getting closer
For any of this to make sense, you have to think long term.
In the first decade of Alaska oil production, the distance was high.
In 1975, the state enacted a temporary reserves tax to generate revenue from oil that hadn't been produced. In 1977, it enacted the Economic Limit Factor, the severance tax structure that remained in place for nearly 30 years. In 1978, it enacted the "separate accounting income tax," a new method of calculating how much industry income that came from Alaska operations. In 1979, the federal government issued leases in the Beaufort Sea with profit sharing provisions. Those changes brought the state revenue from new oil fields that were money machines -- easy to produce at time of high oil prices.
In the second decade, that distance decreased.
The Hickel administration negotiated settlements on several tax and royalty disputes. Those settlements increased state revenues, but "no information was ever made public about these settlements beyond the amount of money received," according to Berman.
Berman believes that the distance continued decreasing under the Knowles administration. During a period of declining revenue, the State renegotiated expired leases in the Beaufort Sea to get rid of profit-sharing provisions, supported the merger of BP and ARCO without making major demands and passed the Stranded Gas Development Act that let the state negotiate a separate fiscal regime for natural gas.
The Murkowski administration drastically overhauled the tax system in 2006 with the Petroleum Profits Tax, or PPT, which taxed profits rather than the gross value of the oil, allowing companies to deduct costs first. Berman still sees this as a moderate decrease because of the private negotiations between the state and the industry. Berman and others saw the current tax regime, Alaska's Clear and Equitable Share (ACES), as a response to the VECO scandals of 2006. But ACES didn't significantly increase the distance between state and industry because it kept the profit-based tax preferred. It's worth noting that Sarah Palin campaigned on bringing back an ELF-like gross tax, but changed her mind after she was elected governor and discussed it with her new cabinet.
Berman sees a gradual alignment of interests. In the early years, the state needed money and the industry wanted to hang on to the big profits of easy oil on the North Slope. Today, the state is relatively flush and the North Slope is old and fussy. So the state wants to encourage investment without reducing revenues and the industry wants to find the most profitable way to keep the North Slope producing for as long as it can.
"The antagonistic attitude toward large corporate interests, characteristic of the 1970s and the earlier, never died," Berman wrote in his 2008 analysis of Alaska oil tax policy. "But the power of that attitude to shape the state's oil revenue policy appears to have faded, even in the face of a public corruption scandal involving industry interests."
Some may see this as caving to corporate interests. Others may see increased cooperation between the state and its biggest financier. Berman sees some benefits to decreased distance, saying that it can create a more agile government and reduce conflict.
Anyone who sat through the past five years of tax debates might find it ludicrous the think that government is more agile or conflict free than in the past, but consider that recent changes have essentially been revisions to PPT, not un-doings. And consider also that the oil industry took separate accounting all the way to the Supreme Court and that Alaska repealed it out of concern that its liability was untenable. That caused the largest decline in oil tax revenues not related to price. There is some debate about how much the Legislature expected to lose, but general agreement that their estimates were low.
The trade off, Berman said, is transparency. Closeness means negotiations. "Alaskans, aside from the few officials involved in the negotiations, will never know what their public servants left on the table to achieve these agreements," Berman wrote.
What is on the table
That's part of the debate going on in Juneau right now: flexibility versus transparency.
Parnell believes the state needs to act fast. "I see companies already voting with their investment dollars to go to other states. That, to me, says we can do a better job making Alaska more competitive," he said at a press conference Tuesday, adding that he believed the Legislature could and should review and pass the bill during the regular session.
Skeptics, primarily the House Democratic Caucus, want to know what the state will get in return from industry. "I'm very concerned about the speed with which House Bill 110 is being pushed through … The bottom line is that the industry has said our tax rate is adversely impacting investment and exploration and spending in Alaska, but they're unwilling to commit to doing any investment or exploration or spending in exchange for a lower tax rate," Rep. Berta Gardner said during a press conference early the same day.
While Berman acknowledges there is a current debate between flexibility and transparency, he believes HB 110 doesn't tilt the balance very much. He said if there is a change in distance, it's only a small step closer, making HB 110 closer to PPT than ACES, but that the primary issue is about the right amount for government to collect.
"However, it is difficult to predict where we will be in a couple of more years," he said.