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Business/Economy

Low oil prices could trim state revenue by $1.2 billion this year, state says

  • Author: Dermot Cole
  • Updated: July 7, 2016
  • Published October 25, 2014

Less than two weeks ago, Gov. Sean Parnell said that at current oil prices, the state would take in $150 million more a year with the current oil tax structure than the old one.

In Anchorage six days later, he said that at current oil prices, the state would take in almost $200 million more under the new system.

It's a fluid situation.

Oil prices dropped by more than $3 on the day Parnell spoke in Fairbanks and remain close to $80, accounting for the theoretical $50 million difference.

Both the old tax system and the new one are based on net profits, which means that as prices drop, so do the taxes. The new system is set up so that the state collects more money on the low end and a lot less on the upper end.

There was not a big dispute in the Legislature about increasing taxes on the low end -- the major focus was on what would happen with oil at $120 and above. Oil prices had stayed up in triple digits long enough that what has just happened seemed a remote possibility.

As Parnell pointed out on the campaign trail in Fairbanks and Anchorage, the oil tax cut that he championed amounts to a significant oil tax increase at these levels, compared to the old regime.

What the governor did not say is that neither system would bring in enough -- if these prices continue -- to avoid a multibillion-dollar deficit under the budget approved by the Legislature and the governor.

A new estimate prepared by the Department of Revenue says that if oil prices average $85 for this fiscal year, state oil income from production taxes under the new law would drop to $475 million.

That would be $1.2 billion less than predicted last spring.

Under the old tax system, Alaska's Clear and Equitable Share, an $85 oil price would have meant a drop of $1.4 billion, the department says.

Put another way, the new system, with oil at $85, amounts to a $258 million tax increase on the oil industry.

It's important to remember that daily oil prices are not a guarantee of what lies ahead. An economic or political crisis -- or a change of heart in Saudi Arabia -- could send prices back into triple digits as quickly as they disappeared.

Leaving aside the issue of how likely we are to see a new drive to "make Alaska competitive" by lowering taxes on $85 oil or what this means to the hoped-for increase in oil investment and production, there is a more immediate concern.

The steep and sudden drop in oil prices -- brought about by increased world supplies and a reluctance to cut production -- has all petro-states and nations checking the numbers on a daily basis.

In Alaska, oil prices averaged more than $100 in July and August, which means that if the price averages $80 for the rest of the fiscal year, the annual average would be about $85.

With an $85 annual average through next summer, the deficit would be about $2.9 billion. The deficit would be reduced to $2.2 billion if the oil prices average $95 for the year, according to estimates by the Division of Legislative Finance.

The budget approved by the Legislature and governor last spring envisioned a $1.3 billion deficit.

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