Supporters and critics alike of Alaska Governor Sean Parnell's proposal to lower oil taxes received mixed news in the form of a recent confidential briefing from oil industry expert Pedro van Meurs.
This past legislative session, Gov. Parnell introduced a bill to lower the tax burden on oil companies operating on Alaska's North Slope in hopes of stimulating more production to offset the twenty-year decline in throughput.
Supporters of the governor's legislation point to declining oil production and loss of jobs due to punitive tax rates that are keeping companies from investing. A number of studies including Wood Mackenzie and the Fraser Institute have placed Alaska near the bottom in terms of global competitiveness when it comes to tax burden.
Critics of the governor's legislation argue that employment on the Slope is at an all time high and the state's tax take is just fine, as evident by the high profits reported by oil producers. Regardless, critics say, companies have done little or nothing to guarantee that any tax break will result in re-investment in Alaska's oil patch.
The recent report will do little more than keep the debate high-centered and both sides dug in deep.
In his analysis, van Meurs channels Solomon and splits the baby known as ACES in half. On one hand, the state's current tax system is in deed ripe for some fixes, on the other hand he states, Parnell's proposal does nothing to achieve the necessary changes.
Maybe this is why former President Woodrow Wilson was reported to have once told aides that he wanted a one-armed economist. Wilson was tired of his economic advisors telling him, "on one hand this...on the other hand that."
In addition, van Meurs writes the state's current tax system is too generous with exploration tax credits, while not doing enough to incentivize the extraction of heavy oil and natural gas. He also opines that although the state's current tax take puts the state in the middle of oil producing regions (three stars out of a possible five), lawmakers went overboard on adopting the progressivity surcharge.
His contention that the exploration tax credit program under ACES are too giving and the progressivity factor is too taking, will surely draw fire from both sides of the aisle.
Opponents of tax relief have long pointed to the fact that new companies are coming to Alaska because of the tax credits, and have used that dynamic as evidence the tax rates are just fine. In February, two Democratic lawmakers asserted that promoting the existing tax credits would be more beneficial than simply cutting taxes for all.
Supporters of tax relief have countered that the recent growth of smaller companies into Alaska's oil and gas industry is because of the generous incentives, as acknowledged by van Meurs. However, just like correlation doesn't imply causation, exploration doesn't imply production supporters say. If and when, discoveries are made they argue, the current production tax along with the progressivity factor will deter the actual extraction of the resource.
The debate over oil taxes has been mired in contradictions since its introduction.
In 2007, then-Lt. Governor Sean Parnell was an enthusiastic supporter and defender of the newly adopted ACES tax regime. At the time he declared the tax was fair and even went so far as to list off the capital expenditures announced by oil producers immediately after the tax had been adopted.
In 2010, once elected governor, Parnell suddenly reversed course and declared the tax regime a production and employment killer. Clearly, a large share of the responsibility for ACES rests with Parnell. If he would have had the courage to step in when former Governor Sarah Palin was allowing lawmakers to triple her initial proposal, he wouldn't be in this position.
The debate over the last nine months since the governor introduced HB110 has been almost farcical.
A few days after the governor told the press that the oil industry was voting with its feet, resulting in less employment, his own Department of Labor and Workforce Development testified that employment on the North Slope was at historically high levels.
After saying the production tax was killing investment, critics trotted out reports showing little or no decline in capital expenditures from the industry. And when Parnell's Commissioner of Revenue was asked to defend the administration's position on HB110 during a legislative hearing, he sounded like Palin during her infamous interview with Katie Couric; "I'll get back to ya on that."
And then throw in public opinion which has buoyed critics.
The public is seeing high oil company profits while the price of oil is over $100 per barrel. Concurrently, Alaskans are seeing their natural gas bills and gasoline costs taking a bigger chunk out of their wallets, which is certainly not endearing themselves to energy companies.
Meanwhile Alaska is flush with cash and there is plenty of money for lawmakers to divvy up among their wish list items. Permanent Fund Dividends are growing again thanks to higher taxes deposited into the fund along with a recovering stock market, and there is no immediate threat of a broad based tax. Needless to say, for the average Alaskan, tax breaks for Alaska's biggest economic engine are not simply not resonating.
Historically, the public hasn't bought the argument for tax relief to address the decline in oil production because they've heard the story before while never having to feel any real pain. In a state where oil has paid the bills for over thirty years, a free ride has not only become expected but demanded. Short term gains always trump long term gains and today is the new forever.
While the governor's proposal passed the state House, the state Senate has been far less accommodating. This will remain the case for a few reasons.
The opponents in the state Senate are comprised of a combination of Democrats who adamantly oppose any change to the current production tax and some Republicans who represent districts where the oil and gas industry isn't a major factor among their constituencies. Both groups would rather have the massive new revenues for government spending and are hesitant to risk the bounty due to the fact that oil revenues are the lifeblood of government in Alaska.
Also, given the questionable way the debate has been handled so far by the governor, he must do a better job of laying out the factual case for tax cuts instead of offering anecdotes that have been contradicted by his own administration.
Given the analysis contained in the report by Mr. van Meurs, you can most likely count on none of his suggestions being adopted. There will be strong opposition to a reduction in the exploration tax credits and an equally strong refusal to reduce the progressivity surcharge.
With the second session of the 27th Alaska State Legislature just three months away, Gov. Parnell has promised that he will continue to fight for HB110, his proposal to lower oil taxes.
However, this debate might be all over but the crying unless the Parnell Administration can convince both lawmakers and the public about the benefits of his approach.
Andrew Halcro is the publisher of AndrewHalcro.com, where this commentary first appeared. It is republished here with permission.
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch. Alaska Dispatch welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.