EDITORIAL: The common-sense path Alaska can take on oil taxes

It’s almost as predictable as the changing of the seasons — or maybe more so, this year: When state revenue crashes, proposed changes to Alaska’s oil tax regime start popping up in Juneau. There are many high-minded justifications offered for squeezing oil companies harder for revenue, but the political reality at the heart of each round of proposed changes is simple: It’s easier to get more money from producers that are already paying taxes than it is to sell Alaskans on taxes that might target themselves.

The question of whether Alaska’s oil taxes are fair depends on who you ask, of course. Producers will always say, as they did in hearings last week, that raising taxes could drive away investment, and that lowering them could encourage it. They’ll certainly never say their taxes are too low. For their part, progressives will always argue that oil taxes are too low to fairly compensate Alaskans for producing our collectively owned, non-renewable oil; in their opinion, taxes on production can never be too high. The rest of us fall somewhere in between.

There is one proposed tax change that makes sense, from a fairness perspective: Imposing state corporate income tax on S-corporations (like Hilcorp), which are currently exempt from corporate income tax on other businesses structured as C-corporations (these are typically larger, publicly traded companies such as ExxonMobil and Alaska Airlines).

Although the lack of state taxation on S-corporations has been described as a “loophole,” it wasn’t always so. The federal government doesn’t levy corporate income tax on S-corps itself — instead, it captures revenue from them in the form of personal income tax paid by the owners, which is based on the profits of the company. That was originally the case in Alaska, too; the territory instituted a simple personal income tax in 1949 at the rate of 10% of residents’ federal income tax payment. The state tax rate was tweaked over time as circumstances warranted, but it provided an effective form of revenue capture from S-corporations.

In 1980, however, the state was flush with oil money from Prudhoe Bay, and legislators — with the enthusiastic support of the public — not only repealed the state income tax but also refunded the previous year’s revenue to Alaskans. Unintentionally, they also removed the mechanism by which the state effectively gathered income tax from S-corporations. For 40 years, this has had no substantial effect on state revenue, until three years ago, when BP (a C-corporation) was replaced by Hilcorp (an S-corporation, and therefore not subject to state corporate income tax) as the major operator of the Prudhoe Bay oil field.

Not surprisingly, Hilcorp isn’t favorably inclined toward the bill, SB 114, that would close that “loophole.” Hilcorp would pay an estimated $100 million if the 9.4% tax rate proposed by SB 114 goes into effect, and company representatives told legislators it would likely lead to decreased investment, particularly in Cook Inlet. Given the company’s previous statements expressing uncertainty about delivering long-term supply of Cook Inlet gas, the threat of decreased investment was a clear warning shot for the state, given that a majority of Alaska’s residents’ heat and electricity is delivered via the relatively low-cost gas on our doorstep. Alaskans, it turns out, don’t like to be threatened.

But although Hilcorp is free to rattle its saber in an attempt to cow legislators into leaving the status quo be, it isn’t as though tax parity between S- and C-corporations would be punitive. As it is, Hilcorp is getting a substantial tax break not enjoyed by other major producers — one that was never intended to exist and has no basis in policy.

It should be said, too, that Alaska and Hilcorp are both lucky to have one another. The state has benefited from Hilcorp’s production mindset both in Cook Inlet and Prudhoe Bay, as well as from the jobs and corporate giving the company has continued in BP’s stead after taking over its fields. Hilcorp is a quality operator with low overhead and a bent toward innovation. It makes sense that they would be a natural successor to an aging Prudhoe Bay, and indeed under their stewardship they have increased oil production in a way that their predecessors didn’t. Alaska is better off for their presence. Similarly, Hilcorp has turned substantial profits here (Alaska represents a major fraction — close to 40% — of its portfolio) and would continue to do so if it were paying an income tax rate at the same rate as the rest of the North Slope producers. There is no practical policy reason that they should be exempt from the taxes that every other oil producer in the state pays.

However, the bill that would establish corporate income tax parity for oil producers has two major flaws that will surely doom its chances of passage if its sponsors insist on maintaining its present form. In addition to the income tax change for S-corporations, the bill would also impose divisive production tax credit reductions and ring-fencing that can’t possibly be hammered out in the few days left in the legislative session. These second and third provisions of the law effectively increase taxes on the entire industry. They require much more in-depth analysis and should be tabled or outright dropped.

If legislators want to actually make some headway on tax fairness and state revenue, they should strip out SB 114′s controversial provisions and make it a straightforward fix to align tax rates for oil producers of different structures. The alternative, clearly, is that the status quo will remain — so the smart move would be to opt for some progress rather than none.