Taking stock of oil taxes

In a recent commentary in support of a ballot initiative to raise oil taxes, the Fair Share Act, Robin Brena repeatedly invoked the phrase, “let’s be honest.”

Let’s take him up on that, using citable, accurate data. For that, we use the Alaska Department of Revenue Fall 2019 Revenue Sources Book. Readers can follow as they read.

Brena looked at the past five years, 2015-2019. To start, as Brena cited, in that time the North Slope total market value was $57 billion. This is derived by multiplying the oil price (p. 93) by the amount of oil production (p. 97).

Note: Brena said state oil revenues dropped when Senate Bill 21 — the current tax regime — came into effect five years ago. Looking at oil prices, they were more than $100 per barrel for the years prior to 2015, and then dropped to the $50-$60 per barrel range since. Revenues dropped because oil prices dropped. They would have dropped under any tax regime. Moreover, production today is 100,000 barrels per day higher than what was forecast under the prior tax regime.

What happened to that $57 billion in value? Page 93 of the Revenue Sources Book shows transportation costs — pipeline and marine shipping — consumed $10 billion. Page 99 shows upstream capital and operating costs absorbed $28 billion. This leaves a pre-tax value of $19 billion.

Page 89 shows the total state petroleum revenues (taxes and royalties), plus $2 billion in local property taxes, were $13 billion. Federal corporate income tax was about $1 billion. The combined state/federal government received $14 billion and the producers received $5 billion.

The government received 74% of the pre-tax value. This is called the “government take,” and is what many economists use to compare taxes. Using similar calculations, the Lower 48 government take was about 64%.

This is a vastly different picture than depicted by Brena. He concluded that Alaska producers made more per barrel and paid less in taxes than anywhere else in the world. Why the difference?

Brena’s analysis has a number of problematic accounting perceptions. Here are a few:

• Failure to recognize royalties as payments to the government. Brena called them “part of the oil production the state keeps as rent.” In reality they are payments in either cash or oil.

• Failure to accurately compare oil profitability between Alaska and other places. Alaska operations are about 100% oil. Most other places they are about a 50-50 split between oil and natural gas. Natural gas has about one-fifth the value of oil on a BTU basis. Comparing per-unit oil operations in Alaska with combined oil and natural gas operations everywhere else is comparing apples and oranges.

• Failure to look at net revenues. Brena looks at taxes as a percentage of gross revenues, not recognizing that they include massive costs incurred by the producers.

• Failure to recognize who received past credits. Brena said that during the past five years, tax credits have exceeded revenues. To get to that result, you have to combine two distinct accounting ledgers. Over that period, the large North Slope producers paid more than $2 billion in production taxes, after credits. In those same years, $2 billion in credits were paid or owed to either non-North Slope producers, or small North Slope explorers. These credits have expired. The oil tax initiative is directed at the large North Slope producers. If one is aggrieved by the credits paid to the others, voting for the initiative does nothing.

The Act’s rhetoric does not match the data. This problematic accounting could make Alaska dangerously noncompetitive. The initiative would raise taxes by 150% to 350%, depending on price. This is what the initiative backers believe is fair. These accounting issues are technical and important. Alaskans should understand them before they vote.

Roger Marks is an economist in private practice in Anchorage. He formerly served as a petroleum economist with the Tax Division in the Alaska Department of Revenue.

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