Lawmakers were surprised last week to find that Alaska has given as much as $4 billion in tax credits to oil companies since the incentives were first put in place in 2006.
But they were stunned when they learned that state revenue officials can't say what the money has gone for. Did the credits encourage new exploration and development, as lawmakers intended? Or simply pay for upkeep and maintenance of aging North Slope oil fields?
The question is an important one as lawmakers struggle with whether to significantly change the state's oil tax regime known as ACES, or Alaska's Equitable Share. Although ACES has brought the state billions of dollars in added tax revenue since it was implemented in 2007, oil companies have warned that the tax is too high and cuts into their anticipated profits as fields mature. They say they are better off investing their development dollars elsewhere in the world.
In Alaska -- where residents pay no state income or sales taxes and collect an annual dividend for calling the Last Frontier home -- oil taxes, royalties and fees keep the state afloat, funding more than 85 percent of state government.
But the debate of whether to tweak the oil tax structure has become an annual affair during the legislative session, with some lawmakers arguing for tax cuts to spur oil development and others fighting to hold on to ACES.
Gov. Sean Parnell inherited ACES from former Gov. Sarah Palin, who herself led a charge to overall the oil tax structure that had been implemented under her predecessor, former Gov. Frank Murkowski. Now, Parnell has introduced a bill that would cut the basic rate from the current 25 percent to as low as 15 percent on some fields. Parnell's bill also flattens the controversial "progressivity" element of the tax that now climbs with every dollar increase in the price of a barrel of oil above $30.
Fiscal notes have put the loss to the state under the governor's proposal at $1.5 billion the first year. Democrats, who are generally against changing ACES, say financial forecasts predict a loss of $7.7 billion over five years.
Even legislators who are inclined to revamp ACES say they need to know whether billions of dollars in tax incentives that also are part of the ACES system have worked to encourage new exploration and investment. But at hearings last week and in discussions and hearings this week, state officials acknowledged they can't say, in large part because audits confirming whether the tax credits are legitimate have not been done. There's also an issue with taxpayer confidentiality -- state officials can't reveal some information even to legislators. One consultant suggested that oil companies don't make it easy on state tax auditors in the way they present documentation of how they have spent their money.
State Revenue Commissioner Bryan Butcher and other revenue officials, including audit master Lennie Dees, told lawmakers at Senate and House hearings that some audits -- for 2006 -- has been done. But no audits from 2007 when ACES took effect and beyond have been completed.
Dees told the Senate Finance Committee on Thursday that by law the state has until 2014 to finish the 2007 audits. "Our intention is not to take that long but '07 is going to be the first 12-month period we're going to audit."
The governor's bill would reduce the time in which auditors must complete audits from six years to four years. That would hurt rather than help, critics of the provision say, because if the state couldn't get the audit done in time it could lose millions of dollars.
The state has been struggling to hire enough qualified auditors to review all the claims that have been made under ACES. The auditors need to be familiar with oil and gas operations -- Dees told lawmakers he worked for industry for 16 years before moving to the state payroll -- but the state isn't paying high enough wages to entice qualified auditors away from the private sector.
Surprising answer: 'We're losing money every day'
Sen. Joe Paskvan, who co-chairs the Senate Resources Committee, says he became concerned about the lack of state auditors when another state official testified that the state was losing money every day because it was struggling to complete audits of royalty payments within the six-year time frame.
"That's a somewhat surprising answer when the statement is made that we're losing money every day," Paskvan said.
Even beyond auditors, Paskvan says the state needs a better "accounting infrastructure in the form of a central database" to handle the enormous amount of data submitted every month by the oil and gas producers.
Revenue officials also raised that same concern in a report they gave to lawmakers at the beginning of the session. The report concluded, in part, that they lacked the information to determine if ACES was actually encouraging more development and creating more jobs than the previous tax system.
And two years ago, for fiscal year 2010, the state had asked for more than $23 million to put in a "complete integrated tax processing system." The budget request noted "currently the division does not have a computerized system for oil and gas production taxes. ... Computer systems that are in place for other tax programs are outdated and do not provide needed functionality," the request said. The money was never approved in the budget.
Former state Revenue Commissioner Pat Galvin says the lack of information has long been an issue when it comes to oil and gas operations and how the companies spend their money. And while the companies have historically fought efforts by the state to require more detailed information, Galvin said it's not always the industry's fault that policy makers aren't getting the information they need.
"The issue of whether money has been spent on maintenance or a new project becomes very difficult for the department to report because it could violate the confidentiality requirements," he said.
He called it a "misdirection" to blame the lack of information on the audits because the information has already come into the department in the form of a tax return. The audit is simply to verify what's already on the return, he said.
Still, Senate Finance co-chair Sen. Bert Stedman emphasizes they need sound information before they can make decisions about changing the tax structure. Figuring out what $4 billion in tax credits has achieved is a major part of the picture, he said.
Is there enough time for a complete analysis before session ends?
Stedman has insisted on thorough analysis by state officials who can then present detailed reports to his committee. He has been critical to some degree of House committee presentations that haven't addressed all aspects of the tax debate and tax credit issues. But Stedman's resolve to go slow has led to concern by House leaders that the tax proposal may not be resolved by the end of the 90-day legislative session.
Senate President Gary Stevens told reporters Monday that the subject needs to be handled correctly -- and that means, perhaps, not quickly.
"It's such an important issue," Stevens said. "I think most of us had no idea we were dealing with $3 billion to $4 billion in credits. That's an enormous amount of money."
And for what? That's a question that is troubling lawmakers.
Sen. Johnny Ellis says he probably doesn't need an auditor to tell him what's obvious.
"The industry has been telling us there is next to no drilling of new wells and no exploration," he said last week at the Senate Finance Committee meeting. "They've spent a lot of money on routine -- and necessary -- maintenance of aging facilities.
"When we created credits, we thought we were incentivizing new exploration to fill up the pipeline," he added. "We may find out the industry is giving us the bill for maintenance. ... We thought we were buying new production, but that doesn't seem to be the case."
Butcher, the revenue commissioner, said as much to the House Resources Committee on Friday. When pressed on the lack of information regarding industry spending and how the Legislature could make a good decision on tax reform without it, he told the committee: "The governor's view is that looking at the lack of exploration and based on the conversations he's had with the companies ... this is something that needs to be dealt with sooner rather than later."
Rep. Berta Gardner asked if there needed to be changes in state law to promote better and more timely information from the oil companies to the state.
"I find it cumulatively kind of alarming that when we're talking about billions of dollars, we don't have baseline information," she said.
Butcher said he would get back to her on that. But on Monday, Stedman said the question is premature.
"I don't think the answers are going to be very easy to find unless the industry comes forward and lays it out -- the three major producers," he said. "Quite frankly, I don't think the Department of Revenue has the detail to answer the questions."