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Alaska oil tax reform should focus on small progressivity change

  • Author: Joe Paskvan
  • Updated: September 29, 2016
  • Published March 20, 2013

The governor's legislation to reduce oil taxes will negatively impact the future of individual Alaskans, and we should work together to stop it.

The reduction in revenues will result in billions of dollars forever lost to our treasury. The ability of Alaska to build and maintain infrastructure, educate our children, preserve public health and safety, operate our university, provide energy solutions and all other activities that contribute to a high quality of life is currently under attack.

The future capacity of Alaska as an owner state to dream big dreams will crumble if Alaska's policy makers fail to manage our resources wisely. Capital and operating budgets will be slashed immediately and likely for decades. Income taxes, sales taxes and loss of the permanent fund dividend will be on our short-term horizon.

If the goal of Senate Bill 21 is to target and destroy the capacity of good government to do good for Alaska's citizens, then that predictable outcome will be its lone measure of success.

In North Dakota and Texas, the resources are privately owned and, therefore, private landowners collect the royalty payment. Currently, private owners in those states demand 25 percent or more of the gross revenue. If Alaska's oil resources were located in either North Dakota or Texas, 25 percent or 30 percent of the gross value of annual production would be collected by the private landowners in royalty alone before the state even gets its shot at the slice called production tax.

In North Dakota, for example, the state collects a production tax of about 11 percent of the gross revenue. Additionally, the oil company pays the private landowner a royalty of 25 percent or more of the gross. This is very comparable to the total gross amount of revenue collected by Alaska under ACES.

Alaska's current royalty percentage is certainly lower than it should be if we were establishing it now. If Alaska's resources were located in North Dakota, the private landowners would take up to $7 billion of the approximate $22.2 billion in FY2013 annual production; instead, they pay only $3 billion via the royalty payment to all Alaskans, the owners of the oil.

Alaska's royalty is only 12.5 percent compared to the 25-30 percent royalties collected elsewhere. Therefore, Alaska relies upon a strong production tax to receive a fair share of the wealth that oil development should bring to the owner and to the taxing authority. As Alaska is both the owner and a taxing entity, it is the combined value of our royalty and tax to the state that must be understood.

If the governor's SB 21 passes the Legislature, Alaska will receive less in combined royalty and production tax than the private owners in North Dakota or Texas would take by royalty alone. It is a certainty that the loss of revenue from the loss of progressivity alone for this year, according to the governor's bookkeepers, is over two billion dollars. Yes, that is correct -- $2.070 billion is one year's direct revenue loss to Alaska by the elimination of progressivity. Forever gone! Not one more barrel of conventional oil would need to be produced in the legacy fields for Exxon/Mobil, ConocoPhillips and BP to be given that additional $2.070 billion.

Even assuming some adjustment for credits, the percentage of annual production value that Alaska would receive under SB21 as drafted by the governor is only about 12.5 percent. This means that Alaska's combined royalty and production tax, at $110/bbl, is less than the likely royalty alone that an oil company would pay private landowners in North Dakota or Texas. Each 1 percent reduction as measured by gross annual production is a loss to Alaska greater than two hundred million dollars; a 5 percent reduction is a loss to Alaska greater than one billion dollars.

There is a better solution. Modifying ACES only above the $100 to $110/bbl range can be a win-win for Alaskans and the industry. The oil industry has repeatedly identified their concerns by saying top-side profits are taken away under ACES. The only problem with progressivity exists at high and very high oil prices. Why change Alaska's entire tax system when the solution should only be at the top-side of our tax system? You do that by lowering the rate of progressivity above $100 to $110/bbl and also potentially capping the rate of progressivity at $150 to $160/bbl pricing.

Alaska should not give away $2 billion a year in revenue. In order to preserve Alaska's future, we should not accept the giveaway of Alaska's ownership and sovereignty.

Joe Paskvan lives in Fairbanks and is an attorney at Paskvan & Ringstad. He served as a Democrat in the Alaska State Senate from 2008 to 2012, including a year as co-chair of the Senate Resources committee.

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

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