JUNEAU — Amid a worsening state fiscal outlook, legislation that would raise more revenue from the oil and gas industry was introduced Friday in the Alaska Senate.
The state Department of Revenue projected earlier this week that the state budget would take a $925 million hit from falling oil prices over the current fiscal year, and the new fiscal year that starts July 1 — compared to projections made in December. Supporters of Senate Bill 114 say it could help bridge the state’s fiscal gap by making “reasonable” changes to how taxes are levied on oil and gas producers, while concerns have been raised about its impacts to industry investment.
The bill has three central components intended to raise more state revenue:
• A reduction of oil tax credits from $8 to $5 per barrel. Under last year’s daily production of 438,000 barrels, the state could expect to collect more than $400 million. The credits would also be capped to the amount of capital expenditures made by oil producers, which has a difficult-to-determine revenue impact.
• An adjustment to corporate income taxes paid by oil companies. Privately held companies would pay the same 9.4% income tax rate as public corporations. Hilcorp, which operates the Prudhoe Bay oil field, does not pay corporate income taxes as an “S corporation.” That proposed change would only apply to companies that make more than $4 million per year. The tax adjustment is estimated to raise an additional $139 million.
• Implementation of “ring fencing” on North Slope oil fields, which would limit how producers offset exploration and production expenses from their overall tax production bill. That provision would impact ConocoPhillips’ Willow project and prevent the Texas-based oil giant from reducing some of its tax obligations until it started to produce oil. Tax experts said it would be difficult to estimate the precise revenue impacts of those changes. But some of those provisions may themselves change during debate as more is learned about Willow.
The Department of Revenue estimated in February that Alaska’s current oil tax structure means Willow would cost the state upward of $1 billion in lost production tax revenue over its first 10 years, before it started generating billions of dollars for the state. Revised projections presented Thursday estimated that the revenue loss would be less than $400 million during construction, and that the state would gain more than $1.3 billion over the oil field’s first decade.
“I think this is a reasonable solution that could garner a lot of support,” said Sen. Bill Wielechowski, who introduced the bill. The Anchorage Democrat has long supported raising taxes on the oil industry to pay for state services and a larger Permanent Fund dividend. But earlier in the legislative session, Wielechowski said he had not introduced an oil tax measure this year because it did not stand a good chance of gaining enough support from the 17-member bipartisan Senate majority caucus.
[DNR official to Alaska lawmakers: Willow oil project holds promise but faces obstacles]
Now, with declining state revenue and lawmakers planning to draw up to $356 million from the state’s $2.3 billion savings account to pay for unanticipated budget needs and to balance the current fiscal year’s budget, Wielechowski said it was time to propose a new revenue-raising measure from oil and gas. He felt optimistic it could pass the Senate.
“We can’t afford to pay for fundamental services for the people of Alaska,” he said.
Gov. Mike Dunleavy’s budget proposal has a $917 million deficit under current revenue projections, and includes a full statutory dividend that would pay roughly $3,900 per eligible Alaskan at a cost of $2.5 billion. The House’s current version of the budget — largely unchanged from the governor’s spending plan — would pay a $2,700 dividend and create a $400 million deficit. The Senate has discussed a roughly $1,300 dividend, which would leave the state $300 million in surplus. But that dividend figure is still projected to create a deficit within three years without new revenue.
Throughout the legislative session, lawmakers have heard from education stakeholders about a crisis in schools with state funding staying virtually unchanged since 2017. None of the three spending plans currently account for an education funding boost.
[Falling oil prices leave Alaska lawmakers with a $925 million revenue hit, affecting budget and PFD]
Apart from Dunleavy’s carbon monetization bills, no other legislation has been introduced this year that could significantly raise state revenue. Dunleavy’s legislation is not expected to raise revenue over the fiscal year that ends next July.
The last election saw Democrats pick up two in seats in the 20-seat Senate for a total of nine. There’s more interest this year in that legislative chamber for an oil tax adjustment than there has been in recent years.
Golovin Democrat Donny Olson, co-chair of the Senate Finance Committee, scheduled the first hearing on the oil and gas tax bill next Friday in its only committee of referral. Senate President Gary Stevens, R-Kodiak, said that it could be part of a discussion to find ways to pay for state services.
“We are looking for commonsense fixes to help stabilize our budget process, and this is one of many proposals that the Senate will evaluate and see how in shapes into closing our fiscal gap,” Stevens said in a prepared statement.
Debates about adjusting the state’s oil tax structure are notoriously complicated, and contentious. Advocates of higher taxes argue that Alaska is missing out on revenue from its resources, while critics say a higher financial burden on the industry would lead to job losses and quash investment.
There was a provision in a 2020 ballot initiative — a narrower ring-fencing provision on North Slope legacy oil fields — similar to what’s in the Senate bill. The initiative was soundly defeated by Alaska voters.
The Senate’s 42-page bill will bypass the resources committee. Anchorage Republican Cathy Giessel, who chairs that committee, declined to comment on the bill. In 2016, she wrote in opposition to ACES — a previous tax regime with a higher tax burden on the oil industry — over concerns it stifled investment.
The Alaska Oil and Gas Association, an industry group with 14 member companies, did not respond to a request for comment Friday on the Senate’s measure, and neither did a spokesperson for Hilcorp. A spokesperson for ConocoPhillips Alaska said simply that it is “reviewing the proposed oil tax bill.”
The Senate bill could face an uphill battle in the House if it advances to that legislative chamber.
Republican Rep. Tom McKay, who chairs the House Resources Committee, said he would need to closely examine the legislation, but his priority was increasing production. McKay, who has worked as petroleum engineer since 1980, said getting more oil flowing through the trans-Alaska pipeline would be “the most painless” way to bridge the state’s fiscal gap.
“I’m trying to make that pie bigger in my position, and I’m afraid oil tax increases of various types would deter that effort,” he said.
The Senate Finance Committee will first hear the oil and gas tax bill Friday, March 31.