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We must fix Alaska's broken oil tax system before another fiscal time bomb goes off

"Development that actually costs the state, remains Alaska's least understood and most pressing economic problem. Few politicians seem concerned that we do not extract enough wealth from new resource development to offset its costs." – Gov. Jay Hammond, 1994

By now, most Alaskans know we are paying oil companies over $700 million more in refundable oil tax credits than we get in production taxes. That's nearly $1,000 from every man, woman and child in Alaska, this year alone. Yet, this is just the tip of the iceberg. Our oil tax structure is loaded with ticking time bombs that, if left unchecked, will wreak havoc on Alaska's finances for decades to come.

Under Alaska's current tax credit and deduction system, oil companies can claim up to 75 percent of their costs for new exploration, and up to 65 percent of their costs for new development. If you gave someone 65 percent of the costs to run their business, you'd probably expect a pretty good return on that investment, right? Well, we used to have a windfall profits tax that did just that -- provided a fair return to Alaskans as oil prices rose, but only after the oil companies made massive profits. That's the provision that allowed us to save $15 billion between 2007 and 2012 -- the savings we are currently surviving on today.

Unfortunately, when Senate Bill 21 was passed in 2013, it eliminated this provision of progressivity and crippled Alaska's ability to rebuild our savings during periods of high oil prices. Instead, SB 21 has socialized the risk for the oil industry so the people of Alaska literally pay the price, but privatized their profits so the oil companies reap the benefits. No business in the world would operate the way Alaska has.

But it gets worse. Our oil tax structure is a "net profits tax," meaning that companies can write off expenses and losses before paying production taxes. As oil prices slowly creep up, and when Alaskans should be expecting to finally receive some return on investment for the subsidies we've been paying, companies will instead be allowed to write off their losses from previous years. The bottom line? Alaska will lose out on another $751 million through 2023 as companies write off losses from prior years.

As prices increase further, another ticking time bomb explodes. A new set of tax credits kick in, allowing major oil companies to write off over $1 billion in deductible tax credits per year as oil prices hit $80 per barrel, mostly for oil they promised to produce many years ago, in many cases before the passage of SB 21.

Additionally, SB 21 added a section stating that "new oil" is to be taxed at an extremely low rate, or possibly even zero -- forever. The oil industry demanded that "new oil" be defined to include any oil produced from fields in place since 2003 -- 10 years before SB 21 passed. Eventually, most oil on the North Slope will be considered "new oil," meaning that as we go forward, another ticking time bomb goes off as the number of oil fields paying production taxes will be greatly reduced if not eliminated entirely.

Numerous other seemingly innocent provisions in SB 21 are actually financial land mines. For example, one section allowed oil companies to change the way they claim credits, from a monthly calculation to a yearly one. Cost to Alaskans: $112 million in 2014 alone.

With all the tax credits and deductions currently allowed, Alaskans will be paying out more in refundable tax credits than we get in production taxes through 2024.

The stated goals of SB 21, dubbed by its supporters as the "More Alaska Production Act," were to get more oil into the pipeline (then-Gov. Sean Parnell infamously set a goal of one million barrels a day within 10 years, with tax breaks being "vital" to that effort), bring more revenue to the state, and grow the Permanent Fund. Yet even before oil prices crashed, projections showed continued plummeting oil production. In fact, the latest Department of Revenue forecast calls for a mere 300,500 barrels per day in 2025 -- nearly half of where we were under the ACES tax structure.

The House and Senate Democrats and independents stand united in our belief that this oil tax structure must be fixed. We share the frustration of many Alaskans, and will not stand idly by as $1,000 from every Alaskan's PFD is taken away to be handed over for oil company subsidies. The Legislature must think first of the people we were hired to serve, and work in a bipartisan manner to fix this broken system.

In the frenzy to "Make Alaska Competitive" in 2013, the Legislature failed to heed Gov. Hammond's warning about development that actually costs the state. Alaska's oil tax structure is flawed at all price levels and across all time horizons. The time to fix it is now.

Bill Wielechowski, a Democrat, represents Anchorage's District H in the Alaska Senate.

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@alaskadispatch.com. Send submissions shorter than 200 words to letters@alaskadispatch.com or click here to submit via any web browser.

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