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State, boroughs brawl over Alaska gas line property tax windfall

  • Author: Pat Forgey
  • Updated: September 28, 2016
  • Published December 17, 2015

JUNEAU -- A natural gas pipeline has been looked to by Alaskans as their financial salvation to replace dwindling oil revenues, but it may provide more salvation for some than others.

Communities along the route of the pipeline from Prudhoe Bay to a liquefied natural gas export terminal at Nikiski have spent the fall negotiating with the state and other communities about how to divide up the estimated $15.7 billion in property tax revenues the project will produce over 25 years. The state has proposed a payment-in-lieu-of-taxes structure, hoping to avoid the contentious history of the trans-Alaska oil pipeline, and its associated lawsuits.

The idea behind a PILT is to remove uncertainty from the Alaska LNG project, so that communities know what kind of revenue to expect, and the companies that are considering a $55 billion investment in the huge project know what it will cost them to build and operate, state officials say.

"Uncertainty is the enemy of investment," said Fred Parady, deputy commissioner of the Department of Commerce, Community and Economic Development.

But the Municipal Advisory Gas Project Review Board established by the Alaska Legislature has been struggling to reach an agreement on how the tax proceeds should be split up.

What's at stake is shown by the huge size of the numbers involved at at time when dollars are tight and the state is facing years of deficits. The numbers include an $800 million PILT payment from Alaska LNG to help communities deal with costs such as schools, police and streets during five years of construction.

Then, after the LNG project is in full operation, it would provide annual PILT payments of $600 million a year to be divided among communities and the state.

Most of the infrastructure on which property tax would be paid is located in the North Slope Borough and the Kenai Peninsula Borough, with lesser amounts in other areas.

Kenai Borough Mayor Mike Navarre said his community is willing to share with the rest of the state, recognizing that standard property tax methods used for other oil and gas projects would provide his borough with more revenue than it needs, and actually threaten Alaska LNG's financial viability.

But the review board is struggling to reach an agreement on a recommendation to the Legislature, and has already missed one deadline.

At a meeting of the board Wednesday in Anchorage, State Commissioner of Revenue Randy Hoffbeck suggested a 50-50 divide of the property tax revenue between the state and the municipalities.

Matanuska-Susitna Borough Mayor Vern Halter didn't like that split.

"You are going to get the profits, and we're going to be left on the hook, that's what it looks like to me," he said.

Halter wanted to know what the state, which would own a quarter of the finished Alaska LNG project, expected to earn from it.

"What are the profits, and when are we going to see those numbers?" Halter asked.

Hoffbeck said the state and its partners were still studying the project and attempting to determine what its profits would be.

"I don't think we have profit numbers we can even offer at this point," he said. "We have a long way to go before those economics are going to be totally determined."

North Slope Borough Mayor Charlotte Brower said each municipality should negotiate its own PILT with the oil companies, without the state.

"The allocation of PILT should be done through an agreement directly between the municipalities and the taxpayers, the taxpayers being the oil companies," she said.

The North Slope Borough and other municipalities have the ability and authority to negotiate PILTs on their own, she said. The state could negotiate its own PILT for property taxes it wants to collect for areas not within boroughs, she said.

Hoffbeck later said he was not surprised by the reaction to his sharing proposal.

"I didn't expect it was going to be met with great joy," he said.

Under the current property tax system, which applies to the trans-Alaska oil pipeline and other infrastructure, a huge share of the property tax revenue goes to the North Slope Borough and a smaller, but still large share goes to Valdez. Hoffbeck said he doubted the Legislature would allow a repeat of that system.

"There's been a lot of angst and there always has been over how much went to the North Slope Borough and Valdez" under the current property tax on oil facilities, Hoffbeck said. "I can't imagine they'd replicate that going forward."

Kenai's Navarre said the Legislature would want to spend Alaska LNG's property tax receipts itself.

"Whether we like it or not, it's going to be looked at as $600 million a year available for allocation, that's how the Legislature will look at it," he said.

"The politics is going to get us," Brower acknowledged, pointing out her borough was represented by only two of the 60 members of the Legislature.

Hoffbeck also proposed using a portion of the state's share to provide state assistance to local governments of $100 per person. He said that was an acknowledgment there would be costs spread around the state, not just in those communities that have gas pipeline infrastructure physically located in their boundaries.

While the review board was struggling to determine how to divide up the property-tax pie between communities and the state, attorney Robin Brena appeared before the board to say the pie itself should be bigger.

He said the $55 billion estimated value of Alaska LNG was based on its anticipated construction cost, but it was likely there would be significant cost overruns and the actual value of the completed pipeline would be far higher.

By taxing less than the actual value of the pipeline, Alaska would be giving its owners a subsidy, despite the lack of profit numbers that could show a subsidy is necessary.

"There is a complete absence of any analysis suggesting a reduced PILT is needed or appropriate to achieve the construction of a gas line," said Brena, who represents local governments in lawsuits over the value of the Trans Alaska Pipeline System.

Hoffbeck acknowledged there had been huge cost overruns on the trans-Alaska oil pipeline, but said the price of oil was high enough the pipeline was still profitable, even at the higher final cost.

The lower value of natural gas is likely to prevent such a scenario from happening with Alaska LNG, he said

"The economics of this thing can't support cost overruns as high as TAPS," he said.

The review board was expected to provide a final recommendation to the Legislature on Tuesday, but now expects to provide its report in January. Hoffbeck said the delay should not hinder legislative activity because it is unlikely they'd have time to consider gas line property taxes during a session expected to be dominated by budget issues.

That will likely take a special session next year, he said.

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