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The economic case for keeping Alaska's oil tax reforms

  • Author: Tony Knowles
  • Updated: June 29, 2016
  • Published May 5, 2014

Sen. Patrick Moynihan coined a memorable retort in a Senate debate when he said, "Everyone is entitled to his own opinion but not to his own facts." Thanks to the economic research and analysis by Dr. Scott Goldsmith, professor emeritus of economics at the University of Alaska Anchorage, we can now look at real facts in the ongoing debate of whether Alaskans should support or reject the oil tax reform passed in 2013.

I join many Alaskans who express profound concern that the continuing reduction of oil at 6 percent a year is a pending economic disaster for Alaska. Oil tax revenues provide about 90 percent of our state's unrestricted general fund, which pays for things like education, public safety, health and human services, transportation and other essential services.

The state has one primary tool to increase oil production -- the structure of oil taxes. In 2013, the legislature passed SB21. After its passage, the Department of Revenue predicted a $2 billion reduction in state oil revenues for 2014. Critics of SB21 called it a "$2 billion giveaway." Signatures were gathered for a referendum to reject the bill and return to the previous tax structure, "ACES." Now Alaskans will vote on Ballot Measure 1 in August.

Many Alaskans have been hoping that an objective and knowledgeable third-party analysis could help shine a light on the facts. Goldsmith has provided us that insight.

A presentation by Goldsmith last week, available at www.iser.uaa.alaska.edu, began by showing that the "$2 billion giveaway doesn't exist." He pointed out that a substantial reduction in state revenues would have occurred regardless of which tax structure was in place because of a decline in royalties and a significant drop in the price and production of oil. Only 4 percent of the decrease could be attributed to SB21.

Goldsmith's analysis demonstrated that in the future more tax revenues could in fact be generated under SB21 than ACES, even if there were no increase in oil production. This depends on the trend of production costs increasing faster than oil prices continuing, which experts agree is the most likely case.

Furthermore, Goldsmith determined that state tax revenues would be greater under SB21 than ACES with an increase in investment and oil production. His conclusion comes from a hypothetical model assuming $4 billion additional investment creating new production of 50,000 barrels per day.

All of these facts are powerful arguments that Alaska's way forward is not to go back to an oil tax regime that was leading us off the fiscal cliff.

Some argue that ACES collected massive tax revenues, and we should return to that system. It is true that the state treasury experienced a windfall during the early years ACES was in effect. However, it is a mistake to assume that current conditions would allow a return to those days of huge tax revenues. Goldsmith's analysis clearly explains that today's market conditions of rapidly increasing transportation and production costs, a steady steep decline in production, and falling oil prices are far different than six years ago and have significantly changed the tax consequences of ACES.

Others question why the oil companies would embrace SB21 if there is a strong case that, under the same conditions, tax revenues under SB21 would be greater than under ACES. Goldsmith offers a logical rationale by carefully comparing the two tax regimes. In particular, with the extreme progressivity of ACES triggered by high oil prices, there was very little upside value to the oil companies to offset the investment risk they must assume in order to increase production. Required monthly calculation and substantial fluctuation in tax liabilities all contributed to an unstable and unpredictable fiscal environment.

Since passage of SB21 oil companies have committed to new investments of about $4 billion. Alaska's future would be served best by closely monitoring these promises and their effect on new production and tax revenues. SB21 has been in effect for four months, and we need to give it a chance to work. There will be ample opportunity to make needed changes if the companies' commitments do not generate more production. The referendum is not about the oil companies -- it is about Alaska's economic future; and now that we have the facts, I'm voting no on ballot measure 1.

Tony Knowles is a Democrat who served two terms as Alaska's governor. He lives in Anchorage.

Alaska Dispatch encourages a diversity of opinion and community perspectives. The opinions expressed herein are those of the contributor and are not necessarily endorsed or condoned by Alaska Dispatch. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.

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