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Experts debate Alaska's oil tax tug-o-war

  • Author: Jill Burke
  • Updated: September 28, 2016
  • Published March 29, 2014

Voters will decide in August whether to repeal Senate Bill 21, oil tax legislation passed in 2013 that eliminates Alaska's progressive taxation scheme. It gives oil companies tax breaks when oil prices are high, but taxes them more when prices are low. It also offers tax relief for new oil production.

On Saturday, the merits of keeping or tossing the tax were put to the test when a career academic faced off with a career oil industry consultant for the benefit of University of Alaska graduate students enrolled in Willie Hensley's Alaska Policy Frontiers class.

"As a citizen you have a role in helping resolve this issue," Hensley told the audience, adding that the intensity of the conversation surrounding SB 21 reminded him of other politically and emotionally charged dialogues he's experienced throughout the decades on most of Alaska's crucial issues.

The hope held by Alaska Gov. Sean Parnell -- whose administration led the effort to dismantle Alaska's prior tax scheme, Alaska's Clear and Equitable Share, assembled by his predecessor, former Gov. Sarah Palin -- is that the revised tax structure will inspire oil companies to send more oil down the trans-Alaska oil pipeline. Declining volume, which has been the trend for several years, is a big deal to Alaska, which relies on the oil industry for nearly 90 percent of the general fund revenue it uses to run the state.

Dubbed by critics the "oil giveaway," SB 21 will see its fate decided this summer. Opponents successfully got a voter referendum -- Ballot Measure 1 -- onto the upcoming August ballot. SB 21 was intensely debated as it made its way through the Legislature. Tension remains among Alaskans as to whether passage of SB 21 was a wise decision.

Dueling data

Professor Emeritus Stephen Haycox, a career historian, made the case for the pro-repeal crowd. In his view the Alaska Legislature acted out of fear and without enough information, and he called the tax change unnecessary and unwise since it comes with no guarantees: no guarantee for increased oil flow, no commitments to doing things differently, no use of new money.

"The oil industry has its own view of Alaska, which is not necessarily what is in Alaska's best interest," Haycox told the audience. "The oil companies are not our partner, despite their claims to be so."

Haycox likened the companies to subcontractors hired to extract and bring to market a resource that's owned by Alaskans. "Bowing to the industry should be repugnant to all Alaskans," he said. "Independence takes courage and knowledge."

He summed up passage of SB 21 as a "bad gamble" by the Legislature, one that can be undone through the referendum to give lawmakers and citizens more time to think critically about the next step. He suggested that making adjustments to aspects of ACES that weren't working would have been more reasonable than to nix it altogether.

Force the repeal, force the discussion, and we get closer to a better fix that falls somewhere between the looming fiscal problem and the current structure, Haycox said.

Doing that "will only send us back to the starting point we know wasn't working," countered the anti-repeal, pro-SB 21 voice, Brad Keithley, an attorney and consultant with a background in economics who has worked with oil and gas clients for more than three decades. "Senate Bill 21 is what it took to bring investment dollars back."

Where Haycox came armed with a general sense that SB 21 had been rushed, industry-led and industry-supported, and that the combination made for a bad origin, Keithley came armed with statistics and charts, data designed to highlight the impending "financial abyss" Alaska will soon face if replacement revenue for dollars lost to declining oil production aren't swiftly located.

"None of us are going to want to own homes here in 2023. It's going to look like the 1980s all over again," he said, pointing to an ACES-based graph projecting that in 2023, the state will hit a point at which its spending will exceed revenue and it will have entirely depleted its savings accounts.

"This is not the time to say, 'oh we've got to study it more, we've got to do more analysis,'" Keithly said. "SB 21 produces more long-term revenue to the state than does ACES."

A lack of literacy

Haycox refuted Keithley's analysis that the oil companies can and will do more in Alaska under a favorable fiscal climate. One example? The "big three" in Alaska -- BP, ConocoPhilips, and Exxon Mobil Corp. -- no longer consider Alaska a development player, Haycox said. Within the global portfolios, Alaska is has been in harvest mode for some time, well before passage of SB 21.

"They are going to take as much money as they can get with the least investment of new money," Haycox said. And, he asked, if a big oil company can spend millions to maintain what it's got, and to manipulate public perception and the political climate, why should it spend billions to search out and develop new oil fields?

He then suggested Alaskans do what industry does: Hire the best independent voices money can buy to analyze the situation, a Wall Street expert with the knowledge and skill to to the job right. When billions of dollars are at stake, generated from oil that Alaskans own, it's well worth spending a few million dollars to get the best experts to help us make these incredibly important decisions, he said.

On this point, Haycox and Keithley agree. Somewhat. Keithley also believes the state lacks the level of oil and gas literacy it needs to be fully engaged in the process. But his concept for a solution is in the notion of a state-run oil company, one that the state uses to co-invest alongside industry. As a main player, the state would have no choice but to gain a more sophisticated understanding about the oil industry and investment.

A point of contention between the pro and con sides in the to-repeal-or-not-to-repeal debate is whether it is in developing existing, untapped fields, or in seeking out new ones, that the most benefit to Alaska lies. Keithley believes the smart move is on known plays that require some investment to bring online. SB 21 promotes this concept. Yet supporters of repealing SB 21 see more potential in exploring and developing new fields.

Another point of contention has to do with results already felt in the post-SB 21 era. The year since SB 21 was passed brought an almost immediate revelation that Alaska would see a nearly $2 billion drop in lost oil tax revenue. While that's true, it's not solely attributable to the changed tax scheme. Keithly explained that $250-$300 million is estimated to have been lost as a result of the change in taxes. But the rest of it is the function of a perfect storm: a drop in the price of oil, an increase in costs to the oil industry, and declining volume. Whether under ACES or under SB 21, these factors would have yielded a lower return.

Alaska's primary election is Aug. 19.