On a Saturday night in late April, early in the legislative budget stalemate, Anchorage Democratic Rep. Les Gara said the state should start to rebalance its finances by facing a "glaring problem" in the oil-tax law.
"Right now this state is paying out $650 million over the next two years, more in tax credits to oil companies than we're getting back in production tax revenue," said Gara, an Anchorage Democrat. "That's the big hole in the state's budget."
Fairbanks Republican Sen. Pete Kelly, sitting across the table on the budget conference committee, glared at Gara. "I've had it with the tax-credit discussion," said Kelly, co-chairman of the Senate Finance Committee. "It's almost always disingenuous. They take a tiny piece of the revenue that we get."
At that, Rep. Mark Neuman, chairman of the budget conference committee, called a temporary halt to the proceedings and shut off the microphones just as Kelly was getting warmed up.
On other occasions, Kelly has objected the premise of the argument made by Gara and other Democrats. He says that if you look at what the state expects to collect in the next fiscal year -- about $1 billion worth of royalty oil owned by Alaskans, as well as $275 million in income and property taxes -- it's obvious the state is collecting more from oil than it is paying out.
The Democrats don't dispute that point, but they challenge the assumption that the value of royalty oil and income and property tax somehow justifies the negative numbers on the production tax, which is down by about $2 billion since fiscal year 2014.
While debating the budget on the floor of the Senate in April, Anchorage Democratic Sen. Bill Wielechowski offered a series of credit-cutting amendments to stem the losses from oil-tax credits.
"There's not a business in the world that would say, 'Take the oil and we're going to pay you to do it,'" he said.
Kelly said it was "kind of inappropriate" to deal with tax policy in a budget bill. He contends the credits are best left alone.
"It may be kind of inappropriate but it's a great idea," countered Anchorage Democratic Sen. Berta Gardner.
It's not a great idea at all, Republicans responded, because a big share of the credits is going to smaller companies that don't have a tax liability. The state is offering incentives to get more oil in the trans-Alaska pipeline, they said.
These and other exchanges highlight what has emerged as a major point of contention on the state budget. The majority coalitions in the Senate and House have declined to include reductions in oil-tax credits in the budget discussions. They say it's too soon since the August referendum at which voters decided against repealing the current tax system, known by its 2013 legislative bill number of Senate Bill 21. To change the system now would lead to financial uncertainty for the companies and deter future investment, they say.
Democrats in both legislative bodies have used the same argument on a proposal to postpone paying oil industry tax credits that Republicans have raised about not paying for some state employee raises -- that the state can't afford them. They also say that the refusal to consider any change in credits contradicts Republican assertions that "everything is on the table."
The chief reasons for the imbalance between the production tax and the level of production tax credits are the $45 drop in oil prices since last summer and a profits-based net tax system under which expenses are subtracted before the tax calculation. That doesn't produce much in the way of profits or taxes at low prices.
Just before legislators gathered in Juneau this year, Gov. Bill Walker released an op-ed column that said the state would be paying out $500 million more in oil-tax credits than it would be collecting in production taxes in fiscal years 2015 and 2016. By April, the gap had grown to about $650 million because of lower oil prices.
Walker said he did not want to start his term by reigniting the oil-tax fight, saying that potential changes in the system could be fodder for a future day. The governor has signaled he wants to start discussing the broader tax questions this summer. But Democrats in both the House and Senate opted for an immediate fight this spring, claiming that cutting credits would help reduce the multibillion-dollar shortfall.
The majority coalitions in the House and Senate blocked those efforts, arguing, among other things, that: the credits benefit small companies; key incentives are set to expire before long; Exxon Mobil, BP and ConocoPhillips are still paying a few hundred million in total production taxes; and what turns the overall production tax into the negative are the subsidies that go to companies that don't pay taxes, more than half of that amount going to operators in Cook Inlet.
They've also argued that total tax credits are expected to decline in the years ahead and that tax credits under the old tax system, Alaska's Clear and Equitable Share, or ACES, are being phased out.
"We hit $750 million in those credits this year, which was a surprise, but we have ACES and SB 21 credits involved," Rep. Steve Thompson, R-Fairbanks, said in a committee meeting after the regular session ended. The credits have worked, he said, pointing to new production in Cook Inlet and increases in North Slope freight traffic and development activity that could lead to higher oil production. He predicted tax credits would drop to $250 million in the next two years.
"I think everything has been working the way that we were hoping it would," he said.
There are two basic types of credits: one under which the state pays cash to companies, and one that that allows the companies to reduce the amount they would otherwise pay in taxes.
The cash payment tax credits are expected to decline from $700 million in the next fiscal year to $450 million in fiscal year 2017 and $275 million in 2019, according to an April estimate by Department of Revenue. Those numbers could increase, however, if companies sanction more development projects and seek credits for their investments.
The other type of credit, which allows companies to reduce their tax bills, is expected to increase in coming years, especially if oil prices increase, the revenue analysis said.
And the largest beneficiaries of that credit will be the three major North Slope producers, as the only way to qualify for the credit is to produce oil. The Senate Bill 21 tax system includes a sliding-scale credit that peaks at $8 when oil is priced at $90 on the West Coast and drops to zero when oil hits $160 per barrel.
At prices far below $90, the situation today, the companies can't claim the full credit because of a feature in SB 21 that calls for a 4 percent minimum gross tax if the net profits calculation would otherwise be below that level.
Alaska oil prices have climbed to about $65 per barrel since hitting $50 earlier this year but that hasn't had a major impact on tax revenue. Oil prices would have to climb by about 50 percent from where they are today to move the tax needle in a big way.
If oil prices climb by about $25 per barrel in fiscal year 2017, the full $8 per barrel tax credit would come into play. With oil prices of about $87, production tax credits for the oil producing companies would climb by about $700 million a year to $1.2 billion, the state revenue department estimates. Qualifying for the increased credits would hold down the increase in production tax revenue.
In rough numbers, production tax revenue with that jump in oil prices would go from about $300 million in 2016 to $800 million in 2017, according to the spring edition of the Revenue Sources Book.
Former Gov. Sean Parnell, many legislators and the backers of SB 21 described the per-barrel credit feature as the mechanism in the law that tied tax credits directly to production.
With no production, there is no credit, they said. In the old ACES system, tax credits were tied to spending, not to production, they said.
"Companies are treated fairly, and in order to get tax relief from the state, companies must put more oil into the pipeline," Parnell wrote after the approval of SB 21.
The per-barrel credit system gives the highest reward for production when oil is priced at about $90 per barrel. The credits disappear when oil hits $160.
While Senate Bill 21 refers to the per-barrel credit as a credit and it was promoted as the means of linking production to credits, consultants hired by legislative leaders say that is not the best way to think about this part of the tax system.
Janek Mayer and Nikos Tsafos, partners in the consulting company Enalytica, told lawmakers in January that the per-barrel tax credit is really a way to lower the tax rate when oil prices are below $160. It is not a "cost" in the sense that the state has to pay money to the companies.
The consultants referred to the credit as a "mild form of reverse progressivity," meaning that the tax is lowest at $90 when the credit is highest. The tax is highest at $160 per barrel, when the credit goes away.
"Thinking about it as a credit in terms of money that's somehow being handed back to companies is incorrect. This is simply a feature of the tax system that is intentionally designed to reduce the tax level at lower oil prices," said Mayer.