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Myth-busting claims in Alaska's oil tax debate: Part I

Amanda Coyne,Alex DeMarban
Aaron Jansen illustration

You've probably heard that Alaska state legislators are debating whether to lower taxes on the oil companies. Competing plans are floating around Juneau, but the one that's gotten the most attention is Gov. Sean Parnell's bill, which would lower taxes about $2 billion a year on the oil industry.

That's a lot of money. So you Alaskans, as resource owners, might want to know what you're going to get for your money and why there's a big rush to give the oil companies a tax break. Well, the truth is that you're not going to get a complete answer to either anytime soon. 

The governor says that it's part of his plan to get a million barrels of oil down the pipeline. However, nobody has promised that lower taxes mean more oil. Indeed, the fact that the state has received so few assurances makes some wonder if the governor's push is simply a platform for larger political ambitions. That, of course, is pure conjecture. But then again, so is the theory that lower taxes equals higher production.

RELATED: Part II: More myths in Alaska's great oil tax debate

What we do know is that you're probably confused. Much of what you've seen and heard -- charts and graphs and endless presentations by oil company executives, lawyers, analysts, and more lawyers -- has probably gone right past you. Marginal tax rates versus effective tax rates. Progressivity and proven reserves. Gross versus profit. Tariffs and transportation costs. The terms seem designed to confuse.

When it comes to the oil tax debate -- the lifeblood of the state -- Alaskans have been confused since their dance with the oil industry began. It's confusion that's largely arisen due to lack of hard data, like how much oil is on the North Slope, to say nothing of what it costs to produce and how much the oil companies earn here. Hence, it seems it always comes down to judgment and trust, and with such conflicting data, and facts being thrown around, it does make you wonder who to trust. Obfuscation doesn't help. 

It is a fact that oil companies have made Alaska as we know it. We have libraries and performing arts groups and paved roads and big parking lots largely due to oil. But that doesn't mean that we should believe everything they tell us. It doesn't mean that we shouldn't fact-check the propaganda.

In that spirit, below is what we consider top three myths perpetrated by the oil companies and/or those fighting the battle to lower taxes. Tomorrow we'll give you three more. The six myths that we've chosen to examine are by no means a comprehensive list. But the heart of the argument to lower taxes seems to rest on these myths that have arisen, one way or the other, from the oil industry and their allies -- myths that those who know better have done little to quash.

Here are the first three (of six) Alaska oil tax myths:

Myth No. 1: Oil companies are always trustworthy business partners

"Can we trust Big Oil?" could be the biggest question in this whole oil-tax debate.

History is our guide. Although oil long has been the bedrock of Alaska's economy, our confidence has been rocked over the years. There was Exxon's promise to fishermen after the 1989 Exxon Valdez oil spill, something about, "We will make you whole," before they went toe-to-toe with fishermen in a legal battle that dragged out two decades. More recently, there was the corruption scandal that upended Alaska politics and led to the conviction on bribery-related charges of lawmakers and Bill Allen, head of the largest oilfield service provider on the North Slope.

More recent information tests our faith and oil company trustworthiness further.

The recent court battle over the pipeline's value showed there are two different tales when it comes to the life of the pipeline. Alaskans have been beat over the head with the notion that the pipeline, now moving 600,000 barrels a day, is dangerously close to shutting down because of complications caused by low flow.

According to a recent court case, the pipeline's owners have said that the trans-Alaska pipeline will no longer be able to carry oil at flow rates between 300,000 and 350,000 barrels a day. A worker with pipeline operator Alyeska told the state judge in the case that the pipeline could not operate below 300,000 barrels a day.

However, an expert that BP hired said it could operate economically between 70,000 and 100,000 barrels a day.  

An oil company expert testifying for BP, the pipeline's largest owner, also told the judge that the line could be shutdown as early as 2021. However, BP told the Securities and Exchange Commission that the line would be economical until 2075. In other words, the pipeline will survive decades longer than some Alaskans have been led to believe. It's also worth billions of dollars more, a decision important to municipalities that tax it.

There are also two different stories on whether Alaska is a cash cow. A presentation by ConocoPhillips on the website of the Make Alaska Competitive coalition said Alaska has the "highest cost structure" of ConocoPhillips' investments, according to a Fairbanks Daily News-Miner article. On the other hand, company officials last year told analysts and others that Alaska has "higher-than-average margins" and that the company's "strong cash margins" are noteworthy.

So which is it?  

Perhaps no one summed up the issue better than Senate President Gary Stevens, a Republican, who noted in a December speech to Commonwealth North that the state's constitution requires that Alaska's resources be shepherded for the "maximum benefit of its people."

That's people, not corporations.   

Stevens recalled abuses by Big Oil that tested his faith, including the Exxon Valdez spill and the Bill Allen debacle.

He recalled another example:

"Alaska v. Amarada Hess was a court case which found that from 1977 to 1992 companies were guilty of "deliberate falsification in computing the price paid to Alaska for its royalty oil." And ended with the judge saying that we, the state, were guilty of "inexcusable trustfulness in dealing with the oil companies."

-- Alex DeMarban

Myth No. 2: Alaska oil companies are taxed 80 to 90 percent

This myth is perhaps the stickiest. Here's how Anchorage Daily News columnist Paul Jenkins put it: "Because of ACES, Alaska boasts among the highest marginal tax rates in the world, topping 90 percent when oil prices are high." And here's how Make Alaska Competitive (MAC) puts it on its website: "Alaska's oil tax is among the highest in the world." MAC is a coalition set up by Anchorage public relations and advertising firm MSI Communications paid to convince the public to lower taxes on the oil industry.

The myth doesn't come only from Jenkins and MAC. It's spread through charts, graphs, talk-show hosts and even some current and former government officials.

And it's flat-out misleading.

Alaska's tax rate is not 80-90 percent. That would be Russia, Algeria, Angola, private lands in Texas and Louisiana, among many others who tax at a much higher rate than does Alaska. Alaska's tax regime isn't even close to those. In fact, at $100 a barrel, Alaska taxes the oil industry about 40 percent. Confused? You’re not alone.

What those larger numbers refer to, often in small writing at the bottom of charts, is the marginal tax rate -- a confusing term that means as income rises, so does the tax rate.

What you don't hear much about is the effective rate, or real tax rate: what the oil companies actually pay in taxes. Even Department of Revenue Commissioner Bryan Butcher admitted in a committee hearing on Monday that the effective rate is more important than the nominal rate.

Here’s why: a country could charge a 90 percent tax on oil and still have a low marginal rate. For instance, the total government take on every barrel of oil produced in Libya in 2011 was 93 percent. However, the country's marginal tax rate is about 65 percent, according to ConocoPhillips, lower than Alaska's.

So here's what you really need to know. Because we tax on profit and allow a hefty write-off, when oil is selling at $100 a barrel, the effective tax rate is roughly 39 percent.

This is how it works, according to Alaska's Department of Revenue: When oil is $100 a barrel, the companies get to write off roughly $27, what they pay to produce and transport the oil (ConocoPhillips says it's close to $15, but that's another story). So a 53 percent state tax is levied on about $73. That means the oil companies get about $22.50 on a $100 barrel of oil. The federal government's take is about $12.50 and the state's take -- including all taxes and royalties -- is $39, or 39 percent.

That may be a lot. Indeed, it's more than North Dakota levies but not much more. Read on.

-- Amanda Coyne

Myth No. 3: North Dakota is so much rosier than Alaska

Here's how Paul Jenkins put it in the same column referenced above: "Unsurprisingly, North Dakota, with its 11 percent tax rate, looks rosy to the industry right now and that state's economy is sizzling." Tara Sweeney, a senior vice president of Arctic Slope Regional Corp. went as far as to say that Alaska's current tax is "double and triple the rate in North Dakota."

Wrong. According to North Dakota Tax Department analyst Kathy Strombeck, her state's severance take is 11.5 percent, equaling $11.50 a barrel on a $100 barrel of oil. The state's corporate income tax ads another dollar or so to that, and then there's another small sales tax. All told, North Dakota's take is roughly $13 on a barrel of oil. And because the state take is lower, federal taxes are higher than in Alaska.

If that were all there was to it, then Alaska indeed would look like an abysmal place to invest. But Jenkins, Make Alaska Competitive, and others only tell part of the story. Because the vast majority of North Dakota oil is on private lands, private landowners get a much bigger take than the state gets in the form of royalties. The royalties are usually between 18-25 percent of the total take. The average royalty rate the companies pay landowners, according to Strombeck, is about 20 percent. So the landowner gets $20 per barrel when oil prices are $100.

All of this puts the total state tax on a $100 barrel of oil at $33. And that's not including federal taxes, which are higher in North Dakota than they are in Alaska because the companies pay less in state taxes. Nor does North Dakota have nearly the incentives that Alaska has.

But here's what you really need to know: The total state take -- including taxes and royalties -- in North Dakota is about 33 percent. The total state take in Alaska, is about 39 percent. That's a 6 percent difference, nowhere near a "double and triple the rate in North Dakota."

-- Amanda Coyne

Contact Alex DeMarban at alex(at)alaskadispatch.com. Contact Amanda Coyne at amanda@alaskadispatch.com