Alaska has options to stall fiscal crash, but oil tax rewrite is a must

Alaska's current oil production tax system (known as SB 21, or the More Alaska Production Act) is not working, is unconstitutional, and will bankrupt Alaskans -- and it nearly ensures the Permanent Fund dividend program will be abolished.

It will also be impossible for Alaska to come up with the $3 billion per year we will need (in ten years) to fund our pension obligations -- absent a raid on the Permanent Fund.

The media has correctly reported that the price of oil has declined significantly and that Alaska now faces massive budget deficits. But that is only half the story. The media has not reported the negative impact of SB 21 on Alaska revenues and how this scheme gives away our oil.

About 550,000 barrels of oil are removed from Alaska per day through the Trans-Alaska Pipeline System (TAPS). If North Slope oil is selling for $60 per barrel, then the value of the oil removed daily is about $33 million dollars. That adds up to $12 billion per year.

So how much of that $33 million does Alaska keep? Under some estimates Alaska might be paid a bit over $1.3 million per day in severance. But the $8 per barrel credits at oil prices below $80 ensure that Alaska's severance revenue is eliminated at current prices. We are literally paying the industry to take our oil like some banana republic.

It is only our standard 12.5 percent royalty that ensures we have any earnings from our oil at all.

At current prices, because of the credits, SB 21 provides less revenue than other taxation schemes of the past, such as Economic Limit Factor (ELF), and far less than we received with the Petroleum Profits Tax (PPT) (with a 22.5 percent base rate with no credits) when bribes were paid to legislators. The new system proves it is more profitable for the oil industry to employ legislators and their family members directly than to bribe them.

As a hypothetical alternative, to illustrate a point, what if Alaska kept half the value of our oil? A plan where Alaska sold our oil for half the gross value (severance and royalty combined) would change everything. We'd take in $16.5 million per day -- or about $6 billion per year in revenue. We'd eliminate our deficits and stop withdrawing $11 million per day from our savings.

Some will argue this take is too high. Norway collects more for their oil. Norway is the top oil producer in Europe, the third largest exporter of gas in the world, and has $900 billion in savings. Norway has also invested in critical infrastructure such as hydropower so that hydro provides 97 percent of the country's net electrical generation.

Many argue for reduced spending, which is an important step. But there is no way we can cut $4 billion from the FY 2016 budget. Even with cuts -- on the present course -- we are going to have spent all of our savings in the next three years. Then what?

Some argue for the implementation of sales taxes, income taxes and the elimination of the Permanent Fund dividend. Combined, that might raise $3 billion dollars. But that will badly hurt regions of Alaska that are already in recession.

So what should the Legislature do? They've created this mess by growing state spending unsustainably and then giving away our revenue. Those responsible need to step up and fix this before Alaskans lose their homes as our economy and population crashes.

The key steps? First, we must begin collecting a fair return for our oil. No other immediate action will have anywhere near the positive impact on our finances.

We must develop a diversified revenue stream from natural gas sales. Alaska must take control of the gas line project and not let global corporations with projects that compete with us to determine when, or if, a project gets built.

The warehousing of vast quantities of oil and gas must be ended. We also need to follow Hartwick's rule of Resource Economics. In short -- we need to invest revenue from our nonrenewable resources into infrastructure that will generate revenue that will offset and replace declines from oil.

We must also be better informed. Norway has done a lot right. We should learn from them and even consider having direct ownership in the exploration and sale of our oil as Norway does through the Norwegian-owned oil company Statoil. With such an ownership we will not only be able to greatly enhance our revenues, but also develop a better understanding of the cost data we need as we audit net-profit returns where the costs have doubled in eight years.

Merrick Peirce is a board member and chief financial officer of the Alaska Gasline Port Authority, whose mandate from voters is to develop a gas line project for LNG export.

The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)alaskadispatch.com.