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Deceptive language in state oil tax law leads to constant arguments about where credit is due

  • Author: Dermot Cole
    | Opinion
  • Updated: March 24, 2017
  • Published March 23, 2017

You would think that everyone could agree by now, four years into the Senate Bill 21 system, what the oil tax rate is. But because the authors of the bill were too clever by half, there is still an argument to be had, a good one.

In public comments and presentations on the SB 21 tax rate, the Parnell administration routinely portrayed it as a 35 percent flat tax.

The law offered "credits for production," the Parnell administration said, that could lower the tax rate. "Now, credits must be tied to production, not merely spending, and the state doesn't have to put cash up to reimburse companies for those credits," the Parnell re-election campaign said on Oct. 6, 2014.

The definition of "credit" was stretched beyond the breaking point for that political exercise and it continues to create confusion in Alaska, as comments Wednesday during a House Finance Committee meeting demonstrated once again.

The state has a 35 percent oil tax, declared Dan Seckers, a tax attorney for ExxonMobil in Anchorage.

"I'm sorry, I can't let you get away with that," Rep. Les Gara said. He said that is true only if or when oil ever reaches $160 a barrel.

"The lower the price, the lower the actual tax rate," he said. Gara is correct. The system in state law has a built-in tax reduction at lower prices.

He quoted from a chart prepared by the Department of Revenue that shows the effective tax rate is 12.1 percent when oil is at $60 a barrel.

For oil that comes from areas such as Point Thomson, eligible for an extra tax break, the tax rate is zero at $60.

At $80 per barrel, the tax would be 13.1 percent for the older North Slope fields and 7.9 percent for fields like Point Thomson. Oil is now at about $50 per barrel.

"There is no 35 percent tax rate, it is price sensitive," said Gara.

Seckers wanted to argue this. "Sorry, I think you've misspoken on this," he told Gara. "The statutory tax rate in Alaska is 35 percent. You don't believe me? Ask your director of tax under Section 011e."

That section mentions 35 percent and there is no question it is in the statute, but it doesn't mean much. No company pays anything close to that percentage or will be in danger of paying that amount unless oil increases by more than $100 per barrel. At $160, the tax would be close to 35 percent.

Seckers did allow that Gara is correct that the "effective tax rate" is far lower. Case closed. The effective tax rate is what matters.

But I understand Seckers' misplaced insistence on 35 percent, as otherwise he would not be able to testify repeatedly at hearings that Alaska has an oil tax rate under SB 21 that is three times higher than anywhere else in the United States.

"You know what the next tax rate is in the United States on production?" Seckers asked the House Resources Committee during a Feb. 1 meeting. "Twelve and quarter. Louisiana. You guys are almost three times as high as any other state in terms of production tax. Why was that (SB 21) an improvement so to speak? Well because it was predictable."

What's predictable is that it is misleading to say we have an oil tax that is three times higher than anywhere else in the U.S.

And what's also predictable is that this is a word game, the result of deceptive language that found its way into SB 21. The result is that the real tax rate, which varies with the price, is far below 35 percent under any circumstance that we have seen.

Here's why.

The Alaska oil tax law provides that oil at $80 is taxed at a much lower rate than oil at $160. There is no argument about that, even from ExxonMobil.

The means by which this happens is a math formula inserted into the bill that dressed up the lower tax rate as a sliding-scale "credit" which peaks at $8 per barrel when oil hits $90 per barrel.

The credit drops with rising prices and disappears when oil reaches $160. At that price, the tax rate would be near 35 percent.

At the House Finance meeting this week, Homer Rep. Paul Seaton said that "no one knows" where the revised $8 sliding scale credit plan came from, though it popped up in the House Resources Committee version of the bill that appeared on the evening of April 2, 2013. 

This credit was portrayed at the time by the Parnell administration and even now by the oil industry and defenders of SB 21 as the way in which the state provides credits for production, not for spending. This was a classic spin move.

On the one hand, the backers of SB 21 could point to a high tax rate of 35 percent, while on the other they would understand that a complicated system of declining per barrel taxes knocked that way down on the legacy fields of the North Slope — under the range of prices they expected — and could be advertised as an incentive.

At the prices we see today, the minimum 4 percent gross tax applies, so this is a debate that will only show a real impact at much higher prices.

One of the big failings in our system is that there was no real analysis of what an oil price collapse would mean or what a prolonged period of $60 to $80 oil would mean. That seemed unlikely four years ago when the oil tax bill was debated. Most of the slides shown to legislators never mentioned today's prices as a possibility.

One of the proposed changes in House Bill 111, under review by the Finance Committee, would shift the per barrel credit structure so that if oil prices roughly double from today's level, taxes would rise by about $300 million. The proposal would cut the credit to zero at oil prices of $120 per barrel.

Before Seckers gave his testimony, the president of the Alaska Oil & Gas Association repeated comments she has made in the past that the per-barrel sliding credit is not a credit at all, just a math formula for a lower tax at lower prices. That's right.

"By its very design it was never the intent to have an effective tax rate of 35 percent," said AOGA president Kara Moriarty, who referred to these as "so-called credits."

During a 2015 presentation nearly two years after the bill was approved, the consultants to the Legislature who had worked on SB 21 included a slide headlined "PER BARREL 'CREDIT' IS A MISNOMER."

"The credit against the production tax is not really a credit; it has an explicit tax-rate setting goal. Its purpose is to lower the effective tax rate when oil prices are low," Janak Mayer and Nikos Tsafos of enalytica said.

Mayer told me at the time that his message had been consistent. But I have seen nothing from 2013 to show that he or anyone else tried to stop the use of a misnomer that continues to distort the oil tax rate discussion in Alaska.

Columnist Dermot Cole can be reached at 

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