Opinions

With PFD cut on the line, oil company arguments about fine points of tax regs will backfire

In a rigorous point-by-point examination of proposed state oil tax regulations, the oil industry experts displayed their mastery of the subject in voluminous detail — an impressive performance aimed at protecting every cent possible for the shareholders.

Most of the technical details and the cross references in the 30-page regulation rundown are as far above me as the jet stream, but every few pages a sentence or two provided a moment of clarity.

The 111 pages of draft regulations are designed to implement House Bill 247, the bill approved by the Legislature and signed by Gov. Bill Walker. It revised some aspects of state oil subsidies and made numerous adjustments to the tax laws.

From the testimony submitted in October by Kara Moriarty, the president of the Alaska Oil and Gas Association, it's clear that company experts devoted many hours to this chore. Much of it expanded upon questions and observations from a presentation given in August by Tom Williams, a tax attorney for BP and state revenue commissioner from long ago who is an authority in this field.

As I said, a lot of it was written in a language I don't understand, but I managed to grasp a couple of points about expiration dates.

There is an incentive in state law that reduces the value of oil from new production areas. It is called the "gross value reduction," but it doesn't last forever.

The proposed regulations, likely to become final in December, say that the reduced tax — which can extend for up to seven years — can not be claimed for oil produced on the day that the tax benefit ends. But the oil industry trade group said it has a better idea.

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"While we recognize the value in having a clear, unambiguous termination date for each GVR, we note that this clarity can be provided just as well by saying that GVR 'is not allowed for oil or gas produced after the day' " that the tax benefit ends, AOGA said.

This would extend the seven-year lower tax rate for 24 hours.

It's an important symbol, the association said. Cutting off the tax benefit a day too soon "promises to have a greater cumulative negative impact on Alaska over time than the additional production tax that the state stands to collect for each of those extra days."

I agree it's an important symbol. Arguing for a one-day extension of a tax cut will have a greater cumulative negative impact on the industry than the additional production tax that the companies stand to pay.

Because the state is wrestling with plans to cut the Permanent Fund dividend — an issue that everyone in Alaska purports to understand — some will look at this as an easy entry to an argument about how the oil industry is out of touch with the policy choices facing Alaskans, even on matters of symbolism.

To be fair, an executive of ConocoPhillips did testify that the cutoff period should be the end or start of the nearest month because taxes are usually not calculated on a daily basis. "The difficulty of seven days here and two days here, it's just not worth it," said Marie Evans, a company tax lawyer.

In another issue that deals with timeliness, there is the matter of how long interest can be charged on delinquent oil taxes. The new law includes the unbelievable provision that after three years the companies will pay zero additional interest on delinquent taxes.

The Republican champions of this notion in the Legislature said it creates a powerful incentive for the state to get tax disputes settled within three years. What it actually creates is a powerful incentive for the oil companies to fight delinquent tax claims with appeals for as long as possible, allowing inflation to take its toll.

"The Legislature purposely selected the three-year interest application period due to the lengthy time the department takes to conduct production tax audits," ConocoPhillips said in its testimony on the regulations.

The oil industry says the law contains "words that were carefully chosen" to set a zero interest rate after three years, but that the proposed regulations apply the "most punitive" interpretation, starting the three-year time clock on Jan. 1, 2017,  regardless of how many years of interest have already built up in prior years.

The companies say that if a company awaiting its 2010 tax audit is found to be delinquent on back taxes, it will be assessed six years of interest payments to the end of 2016, after which the new three-year phase will kick in. If the taxes are not settled before Jan. 1, 2020, it will be on the hook for nine years of interest payments on delinquent taxes, ConocoPhillips said.

Unlike the one-day extension, the argument about this expiration date is of more than symbolic interest. But in the context of the state fiscal woes and plans to cut the PFD, complaints of this sort will backfire. The existing law may be clear, but I wouldn't bet on the survival of the zero interest rate.

For all of the reasonable comments about the need for Alaska to establish predictable and lasting ground rules for industry taxation and subsidies, the arguments continue and the rules change because of real disagreements over details.

Expect the arguments to resume in 2017, with a sharper tone about relative sacrifice and who is being asked to give up what while the state spends $6,000 a minute from savings.

Columnist Dermot Cole can be reached at dermot@alaskadispatch.com. 

The views expressed here are the writer's 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.

Dermot Cole

Former ADN columnist Dermot Cole is a longtime reporter, editor and author.

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