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Republican legislator proposes oil tax change to help close budget gap

  • Author: Alex DeMarban
  • Updated: September 28, 2016
  • Published April 16, 2015

With the state facing multibillion-dollar deficits, a Republican Alaska lawmaker who recently proposed a personal income tax on Alaskans now wants to raise corporate income taxes on international oil companies operating in the state.

Rep. Paul Seaton of Homer introduced a measure last weekend to change a state accounting method that allows oil companies to deduct losses from out-of-state operations against the corporate income taxes they pay in Alaska.

House Bill 191 would return the state to the "separate accounting" method it once used, when accountants determined the oil companies' tax rates using only in-state profits. The measure would end the state's current "worldwide apportionment" method of taxing global profits.

Seaton said worldwide apportionment allows oil companies to write off less profitable international or Lower 48 domestic production against their highly profitable Alaska production.

The state switched to worldwide apportionment in 1981. State historical estimates and records typically show Alaska would have brought in hundreds of millions of dollars in additional taxes most years if it had practiced separate accounting.

The most recent Alaska Department of Revenue analysis of the state's five largest North Slope oil producers estimated the state would have collected an additional $1.8 billion during an eight-year period that ended in 2013 -- or $222 million annually -- if oil companies had paid income taxes under separate accounting systems.

In the last two years of that analysis, 2012 and 2013, the state would have come out ahead by an average of $338 million.

The state's top producers in 2013, in terms of production, were ConocoPhillips, BP, ExxonMobil, Eni, an Italian oil company, and Chevron.

State officials caution that it's possible worldwide apportionment could be more valuable for the state in the future, as it was in 2006 -- the first year of the latest estimate -- when the state would have lost $44 million if it had used separate accounting. They also say their estimates are educated guesses based on the best available information, since the companies currently aren't required to pay taxes under separate accounting.

Between 2006 and 2013, the department estimated that the effective rate of corporate income taxes paid by those companies fell steadily, to a low of 4.4 percent in 2013.

"What we have is a situation where if you're an Alaska-only company you pay 9.4 percent on your oil and gas profits," Seaton said. "But if you're an international corporation you can write worldwide expenses off your Alaska taxes."

The state used separate accounting between 1978 and 1981. During the four years, the state earned an additional $1.4 billion, or $350 million per year, than it would have under the worldwide approach, he said.

"We just want to make the accounting fair and equitable and not incentivize people to invest overseas to reduce their tax rate in Alaska," Seaton said.

Introduced last weekend, the measure is not expected to pass before the session's end on Sunday. But Seaton expects there will be a hearing as a starting point to get facts on the record, and to set the stage as Alaskans consider how to raise revenues to close massive deficits stemming largely from low oil prices.

Those ideas could include implementing new statewide taxes or tapping the earnings of the sacrosanct $55 billion Alaska Permanent Fund. The Walker administration plans to seek input on balancing the budget from Alaskans this summer, with a conference currently planned for June at the University of Alaska Fairbanks, his office said.

Seaton said he introduced the latest proposal after hearing criticism over his bill to implement an individual income tax for the first time since 1980.

Some complained Seaton should not leave the oil industry untouched. His individual income tax measure, which includes a capital gains tax, was also introduced as a starting point for discussion. It too is not expected to get a floor vote this session.

Budget cuts versus revenue bumps

The Republican-led Legislature has focused on cutting the budget as a first step to resolving Alaska's budget woes.

Sen. Anna MacKinnon, R-Eagle River, said the mood is "somber" in Juneau after the Senate recently reduced the operating and capital budgets by $862 million. Despite the cutbacks, she's said she's still hearing from Alaskans who want more reductions.

"I would say we'll begin talking about revenues when the people of Alaska believe we have the right size of government," she said.

MacKinnon said all revenue-raising options should ultimately be on the table. But she said she'd be wary of increasing taxes on an oil industry that has paid the state's bills for the last three decades, primarily through taxes on oil production that come in addition to corporate income and property taxes. The industry is already eliminating high-paying jobs.

"Where they go, we go," she said. "If they can't continue to produce for Alaska, what's left for us in terms of revenue?"

Seaton said separate accounting or a similar approach is commonly used around the world -- in about 80 oil-producing countries and two states. He said implementing it in Alaska would not drive industry away.

Sen. Bill Wielechowski, D-Anchorage, who in the past has introduced his own measure calling for separate accounting, asserted that the idea has not been approved because oil companies run the show in Juneau and don't want it.

"It's shocking," he said of how much the state has lost under the current accounting system. "Jay Hammond, the former governor, said one of the biggest mistakes he made in office was to get rid of separate accounting. It has cost the state billions of dollars."

The state used separate accounting for international oil producers from 1978 to 1981 -- when Hammond was governor -- out of concern that Alaska was subsidizing overseas investments, said a statement from Seaton's office.

During that time, the state took in an additional $1.4 billion, or an average of $350 million a year, the statement said. Oil companies sued and the state won in trial court. Concerned, however, that Alaska would lose in the state Supreme Court and end up owing a large bill that included interest, Alaska returned to the global method of collecting income taxes.

The state ultimately prevailed in the Alaska Supreme Court and the U.S. Supreme Court later dismissed an appeal. But the state never returned to separate accounting.

A Revenue Department official estimated in 2000 that Alaska lost $4.6 billion from 1982 to 1997 by not using that approach, costing Alaska another $300 million or so yearly, Seaton said.

Brandon Spanos, deputy director of the Revenue Department 's tax division, said the state might have received more income under separate accounting from 2007 to 2013 because of the higher profitability of Alaska operations compared to other areas where the industry operates.

Spanos said it is not surprising that the state went to worldwide apportionment in 1981 and stayed with it. Most states were moving toward a "formulary apportionment" method that taxed global or U.S. profits. Nineteen states currently use it, he said.

He said it is possible worldwide apportionment could bring the state more money compared to separate accounting in the future -- for example, if net profits globally increase enough.

But he also said the state's historical estimates have shown separate accounting would have brought in more for analyzed years.

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