This election, Alaskans are considering a proposed tax increase on oil production through Ballot Measure 1. Proponents argue that the measure can provide a needed source of revenue as the state faces large deficits and empty bank accounts. Opponents argue that Alaska’s oil industry is under enough pressure from rising costs, low prices, and soft global demand.
As it appears on the ballot, the initiative is about four paragraphs of changes to the tax code. Even for folks voting absentee with time to look over the text at home, considering this language may seem overwhelming. So, what does Ballot Measure 1 actually do?
The proponents, opponents and our analysis are all in agreement that Ballot Measure 1 is a tax increase for most oil produced in Alaska. You may have seen different estimates about how big a tax increase it might be, because, like most things, the answer is “it depends.” So what does it depend on?
First, the tax depends on where oil is produced. The measure increases taxes on the larger and older fields on the North Slope, leaving rates for smaller, newer or Cook Inlet areas unchanged. Today, the fields affected account for 80-90% of oil produced in Alaska and include Prudhoe Bay, Alpine and Kuparuk. The Willow project may eventually produce enough to fall under the new taxes, while Alpine may be exempt in as few as five years as its production continues to fall.
Second, the tax depends on the economics of oil. This is also true of the current oil tax system, passed in 2013 as part of Senate Bill 21. Like SB21, the most important factor in determining the tax is the price of oil. In most cases, the higher the price of oil, the more revenue Ballot Measure 1 would raise compared to SB21. Also, as in SB21, the cost of producing and shipping oil matters. When producers have lower costs, there is an increase in the additional revenue raised by Ballot Measure 1 relative to SB21. At prices of $40 and with current costs, producers pay an average of $1.08 per barrel in production taxes. Under the proposed higher rates, they would pay $2.69 per barrel.
Third, the tax depends on when the oil is produced. The new structure taxes oil monthly rather than yearly. Because oil prices can vary over the course of the year, and the tax rate increases as prices rise, the tax will capture more revenue on the upswings than it misses on the downswings.
Fourth, the change in taxes depends on who is investing in the North Slope and where. Through the ‘ring fence’ provision, Ballot Measure 1 prohibits a company’s investment in new fields to be taken as tax deductions on their profits in the older fields. Instead, the company will have to wait until the new fields are profitable enough on their own to deduct the expenses incurred to develop them.
What do these various provisions all add up to? Again, it depends. Had the proposal been in effect over the past five years, it might have raised an additional $1 billion or so per year (on top of the average $400 million per year the state actually collected).
The outlook for oil prices ranges from $40-50 per barrel. At these prices, and if producer costs stayed about the same, the state might raise an additional $200 million-$500 million per year. In the less likely event that prices were to soar and pass $100 per barrel, the measure would raise an additional $1 billion-$1.5 billion per year.
The true amount of revenue raised depends on how much oil is produced. Production is projected to continue declining in Alaska, with or without the impact of Ballot Measure 1. But taxes can create disincentive for investment. If companies slow their investments on the North Slope, production declines might accelerate, potentially eroding some of the additional revenue from the tax increase.
Brett Watson is a Research Professional/Postdoctoral Researcher at the Institute of Social and Economic Research (ISER) at the University of Alaska Anchorage. This article is based on an ISER working paper, available upon request: email@example.com
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