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ISER researcher: ACES brings in $1.3 billion more than MAPA over five years

  • Author: Alex DeMarban
  • Updated: September 28, 2016
  • Published August 8, 2014

The former oil-production tax system that Alaskans will soon consider reinstating would bring the state $1.3 billion more than its replacement over the next five years, according to an analysis by an economics professor with the Institute of Social and Economic Research.

The new study is something of an answer to an earlier study by another ISER researcher, Scott Goldsmith, who provided a more optimistic look at the new tax system, Senate Bill 21. Goldsmith said the new system was not a $2 billion giveaway as critics claimed, would cost Alaska only $88 million in the fiscal year that just ended, and could generate more revenue for Alaska if it led to increased production.

Welcome to the ever-shifting outcomes involving the 2007 tax law known as Alaska's Clear and Equitable Share and the 2014 law known as SB 21, or the More Alaska Production Act. Alaska voters will choose between the two laws on Aug. 19, the result of a citizen's initiative calling for the repeal of SB 21.

Complicating the discussion is this: The future revenues the laws may or may not bring Alaska are a moving target, because the formula is based on three assumptions that change over time, including the tax-deductible costs of producing oil. Change the assumptions and the outcomes change.

Matthew Berman reports that Goldsmith used assumptions for fiscal year 2015 similar to those provided by the Department of Revenue. The assumptions about production-costs had been largely affected by the buildup of Point Thomson, Exxon's project on the North Slope, Berman notes. That project was compelled into development not by any tax law, but by an out-of-court settlement with the state.

Rather than looking at one-time development costs, Berman said his analysis plugged in Department of Revenue cost assumptions for five years, "which better reflect likely future conditions."

Under those assumptions, ACES would bring in about 12 percent -- or $1.3 billion -- more than MAPA over the next five years, Berman concluded.

Berman could not be reached Thursday. He was "off-grid" on a long-planned camping trip in Canada with his daughter, said Gunnar Knapp, ISER director.

The paper was released later than expected in part because Berman had unexpected surgery on his arm, delaying completion.

"I can assure you the timing of the trip is not related to the release of the paper," Knapp said. "It's awkward for all involved but that's just the way it works out."

Goldsmith, professor emeritus of economics at ISER, also could not be reached on Thursday. He is on a long-planned bike trek from China to Istanbul, said Knapp.

Both studies were paid for in part by Northrim Bank, as part of the bank's continuing grant for research under a University of Alaska Anchorage program known as Investing for Alaska's Future. Goldsmith's study had been criticized because the bank's president and chief executive, Marc Langland, is listed as co-chair of Keep Alaska Competitive, a ballot measure group that supports keeping Senate Bill 21.

Knapp said Northrim Bank had no control over the research topic or the findings of either study, and said the conclusions represented the views of the authors, not ISER.

Berman's analysis notes that both tax laws have flaws. A major problem with ACES was that its high effective tax rate could stymie development. After oil producers had netted $30 a barrel in profit, the law's so-called "progressivity" feature kicked in, increasing the tax as oil prices rose. That allowed the state to rake in billions of surplus revenue as oil prices spiked, but frustrated producers that saw their windfall profits reduced.

But Berman said Senate Bill 21 also has a number of problems:

  • It’s complex to administer.
  • Its low effective tax rate for produced oil that is considered new means the state will make a smaller percent of the income from all its oil over time, as more new oil comes on line.
  • Both laws offer tax credits to incentivize development, but Senate Bill 21’s incentives are weighted toward the production phase rather than during the development or exploration phase, meaning they’re not as valuable to the oil industry.
  • "The same loss of state revenue under MAPA as under ACES gives an oil company a less valuable benefit, because the firm doesn't get the production credit until many years after it incurs the investment expenses," Berman writes.

    Berman also found that, "No independent evidence exists that changing from ACES to MAPA has caused or will cause oil industry investment to increase."

    Willis Lyford, spokesman for the Vote No on 1 campaign, said Goldsmith concluded there is "serious upside under MAPA if companies respond and make new investments."

    Companies are doing that thanks to MAPA, but the new oil isn't accounted for yet in state projections, said Lyford. Once it is, the outcomes will further move in MAPA's favor.

    "They haven't counted it yet, but that's the whole point of reform," said Lyford. The new law also removed ACES' excessive progressivity feature, which Berman acknowledged was a problem, Lyford said.

    Sen. Bill Wielechowski, who wants to repeal Senate Bill 21, said the production tax revenue from any new oil will have little value to the state under Senate Bill 21. For new oil, the effective tax rate will be 13 percent -- compared to 27 percent for legacy fields -- because of the credits and deals given to new oil.

    As more new oil is produced, the state will have one of the lowest tax rates in history, he said. "It's a ticking time bomb," he said.

    Wielechowski said it's important to look back at what actually happened: The Department of Revenue has reported that the state would have generated $8.5 billion less revenue if Senate Bill 21 had been in effect the last six years, instead of ACES.

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