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With budget crisis, Cook Inlet tax credits deserve increased scrutiny

  • Author:
  • Updated: September 28, 2016
  • Published June 27, 2015

No one has kept an exact count, but the state has invested about $1 billion in recent years to promote oil and gas development in Cook Inlet through tax breaks and direct cash payments to companies.

The result, supporters say, is a record of investment and development that has transformed the energy industry in Southcentral Alaska. As Anchorage Republican Sens. Anna MacKinnon and Cathy Giessel wrote in a recent opinion column, "in just the last three years, Cook Inlet tax credits have taken us from brown-out drills in Anchorage to affordable energy for another decade."

Along the same lines, Anchorage Mayor Dan Sullivan said, "the economic activity has been significant, but even more significant is having energy security for over half of the state's population."

But at what price has the state purchased energy supplies for Southcentral Alaska? Should the hundreds of millions in annual subsidies have been spent in some other way? And how can the state revise the tax system for Cook Inlet to benefit consumers of natural gas, the state treasury and the Alaska economy?

The Walker administration and the Legislature need to address these questions in the aftermath of the oil price collapse. They can start by updating state law so oil and gas tax credit information is not treated as a state secret.

It is one thing to keep tax returns confidential, but tax credits are another matter. When the state gave money to the makers of the whale movie, the public knew it was a $10 million deal. But the outdated rules governing the Department of Revenue's handling of oil and gas tax credits define almost everything as confidential, so we are prohibited from learning how much each company collects.

We know the Cook Inlet totals, but there is no differentiation or disclosure of good investments and bad investments. Or those aimed at producing oil, which has an effective tax rate of zero in Cook Inlet, as opposed to gas, which is the highest priority for consumers and utilities, but not necessarily for companies collecting credits.

In a recent hearing, Sen. Lesil McGuire, R-Anchorage, described the Cook Inlet subsidies as the Southcentral equivalent of the Power Cost Equalization program that subsidizes electric rates in rural communities. But that program is based on a formula with statistics to back it up. The Cook Inlet subsidies don't exist as an organized package of tax breaks and tax credits, but came about through a series of laws layered one upon another with no clear calculation of costs and benefits.

For oil and gas operations in Cook Inlet, the credits add up to a "very high degree of government subsidy," consultants Nikos Tsafos and Janak Mayer told legislators in January. They said given the "current strain on state finances, it may be wise to ask whether some of the same benefit" credits provide might be achieved without direct cash subsidies from the state. The credits are expected to cost $281 million in the fiscal year that ends this month, up from $33 million in 2011.

Modifying the tax credit system in Cook Inlet so it would resemble the SB 21/MAPA tax model on the North Slope would mean a drop of about $165 million in Cook Inlet credits paid in the next fiscal year, the revenue department estimated in a recent summary of state revenue options. Cook Inlet operations generate about 5 percent of state revenue and 50 percent of state cash credit payments.

"Many of these credits are received by companies that produce oil and gas and are presumed to be profitable but because of the tax cap have little or no tax liability against which to apply them," the report said.

The state expects to pay $400 million in tax credits for operations on the North Slope in the next fiscal year, as well as hundreds of millions a year in tax credits in Cook Inlet. It's at least worth finding out if a better approach would be to use state resources to provide low-interest financing and receive some equity in return.

In addition to plentiful cash credits, the effective zero tax rate on Cook Inlet oil is also worth examining. The revenue department white paper estimates the tax cap in Cook Inlet saved companies from $500 million to $800 million in taxes between 2007 and 2013.

A 2010 law, the "Cook Inlet Recovery Act," which dealt mainly with incentives for a gas storage facility to help utilities and their customers, included several changes aimed at boosting Cook Inlet development with incentives. Oil production in Cook Inlet has risen for four years in a row and is now about 16,000 barrels per day, about what it was in 2007.

There have been 75 oil and gas wells drilled in Cook Inlet since 2010, new gas fields have been discovered and a new natural gas storage facility has helped stabilize supply.

Cook Inlet operations have been excluded from the various net profits tax systems applied to the North Slope. This came about because legislators and governors argued Southcentral Alaska depends upon Cook Inlet natural gas for heat and light and a combination of low taxes and tax credits were essential to reverse the production decline.

In many ways, the state's investments in Cook Inlet simply consist of handing out money and hoping for the best. It is fine to celebrate the increase in gas supplies and declare a Cook Inlet "renaissance," but smart investors ask questions and gather information. We can't afford to do otherwise.

An analysis that includes a tally of the value of the natural gas supplied to the region, the value of royalty oil and gas and jobs and private profits, would produce some of the answers we need to get smart.

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.

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