Following years of billion-dollar budget surpluses – the result of increased oil prices, price volatility, and an oil production tax system called ACES, Governor Parnell pushed through a new tax regime, called SB21. In the year following its passage, state surpluses have turned into forecasts of multi-billion-dollar deficits, while ConocoPhillips reports that its profits in Alaska have risen substantially despite lower production.
Alaska's Department of Revenue has shown that Alaska would have collected $8 billion less under SB21 than it did under ACES over the last 7 years. Many Alaskans believe that this new tax system is special interest legislation that is harmful to Alaska. Through a grass roots effort, Alaskans banded together to easily get enough signatures to submit a referendum on the ballot in August to repeal the new system. A "yes" vote on Ballot Measure 1 repeals the new system and restores the old.
The Department of Revenue now projects decreasing oil production and budget deficits far into the future. Many Alaskans believe that SB21 is a significant cause of Alaska's current and expected future budget problems. However, in early May retired UAA economist Dr. Scott Goldsmith released a report funded by Northrim Bank, a key supporter of SB21, that has been lauded by some as conclusively demonstrating that the new system is in fact better for Alaskans and is not the cause of deficits. What should the public believe: the apparent facts on the ground, or the modeled results of a hired expert?
As former director of the United States Geological Survey, one of the country's largest scientific research organizations, I ensured that research reports were subject to standard procedural and substantive tests and independent review prior to release. Goldsmith's analysis fails these, and has significant problems and weaknesses that undermine his conclusions. It is vitally important for the voters in August to understand that his report does not provide a relevant and useful factual basis to compare the new and old systems.
A few examples of the report's problems:
1) Goldsmith did not submit his work for peer review prior to publication, as generally expected for high-profile academic or research agency reports.
2) Goldsmith has not published his models, nor adequately detailed his model assumptions, to allow even post-publication review by members of the interested public.
3) The analysis relies on public cost data from the Department of Revenue, submitted by producers but not audited by the agency. It is potentially a garbage-in garbage-out problem in modeling. While the quality of these data is not something Goldsmith controls, his report fails to explain the limitations and uncertainty associated with the data's quality and scarcity.
4) Goldsmith claims that his model shows no significant difference in current revenue to the state under the two tax regimes. However, his model appears not to replicate the present facts.
5) Because the future is uncertain, it is standard practice to test a model to see if it at least reasonably replicates past known outcomes. Goldsmith does not do this.
6) Goldsmith's modeling approach is structurally flawed. He presumes that results from SB21 and ACES can be reasonably compared using smooth changes in oil prices. However, ACES captures a portion of windfall profits associated with monthly volatility in oil prices while SB21 does not; using average yearly prices rather than monthly prices underestimates the expected tax revenue under ACES.
7) Goldsmith does not adequately address the differences in incentives provided by the two tax regimes. SB21 credits are based on oil price and whether the produced oil is classified as new or old. This classification process is complex, confusing and easy to game. Consequently, under SB21 much of the already known oil to be produced through already existing infrastructure is likely to get a significant tax break. In contrast, ACES credits were based on actual capital expenditures (you had to do something to get a credit) and on investments in finding and developing new oil fields.
Due to the significant weaknesses in Dr. Goldsmith's report, I believe it doesn't provide an authoritative analysis of the differences between the previous and current tax systems. I urge the public to disregard the report until or unless it undergoes serious technical or peer review.
Dr. Mark Myers has more than 30 years of experience with Alaska's oil and gas issues. He has an extensive background in both North Slope exploration and development with major oil companies, was director of the Alaska Division of Oil and Gas, and the national director of the United States Geological Survey. He has on many occasions provided expert testimony on Alaska oil and gas issues before Congress and the Alaska Legislature. He is a member of federal advisory committees on energy and was a committee member for the recently released National Academies report on responding to Arctic oil spills.
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