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Oil tax credit questions likely to reignite Alaska oil tax debate in 2015

  • Author: Dermot Cole
    | Opinion
  • Updated: September 28, 2016
  • Published January 8, 2015

FAIRBANKS — While proposed state government budget cuts will take center stage in Juneau this year, it now appears that the cost of oil industry tax credits will be sharing the spotlight.

Figures from the state Department of Revenue showing that the state is paying more in tax credits than it collects in production taxes will abruptly rekindle the oil tax debate in 2015.

Less than five months after the effort to repeal SB 21 failed, this is taking place for three main reasons -- the collapse in world in oil prices, the change in administration and the release of jaw-dropping information by the revenue department.

"This year, for the first time in state history, we are making less than zero from a tax meant to compensate Alaska for the taking of its oil resources," Gov. Bill Walker wrote in a commentary published in Alaska news outlets Thursday. While Walker did not call for any specific actions on oil, he said the state needs to "thoughtfully assess our revenue stream."

Walker said he supports incentives but, "I think we can all agree that an oil production tax that nets negative returns to the state does not meet Alaska's constitutional mandate to develop our resources for the maximum benefit of the people."

For this fiscal year, the state expects to pay $1.4 billion in tax credits, with about $1 billion of that going for North Slope operations and $335 million in Cook Inlet and elsewhere in the state, according to department economists.

More than half of the credits are to be used to reduce the tax liability of companies on the North Slope, about $750 million. In addition, about $625 million is to be provided in cash payments to companies, nearly equally divided between operations on the North Slope and other parts of the state, mainly Cook Inlet.

This comes at a time when the oil and gas production tax is taking an 80 percent dive.

As a result, the state is expected to pay out more than $100 million in credits this fiscal year than it expects to receive in production taxes. In the next fiscal year, the outgo is expected to exceed income by about $400 million.

This is not something you heard discussed last summer in the buildup to the vote on SB 21, in part because the Parnell administration wasn't exactly eager to release information that might have raised questions about oil revenue and in part because the oil price collapse didn't begin until the fall.

The often-repeated remark that Alaska is far better off under SB 21 than under ACES ignores the process that produced SB 21, including a chain of events that revealed a multitude of options not taken.

For instance, the Alaska Oil and Gas Association argued in February 2013 that the alternative minimum oil tax of 4 percent, which applies when oil prices tank, should have been done away with as it had "probably driven investments away." Had that position been adopted, the state would be collecting nothing in production taxes now, making the imbalance with credits even greater.

The Parnell administration and the Legislature repeatedly beat back attempts to institute a higher tax floor than the 4 percent that was ultimately included in SB 21.

In 2012, for instance, Fairbanks Democratic Sen. Joe Paskvan said the way to protect the state when oil prices dropped was to institute a minimum 10 percent gross tax on oil production from Prudhoe Bay and Kuparuk, but the Legislature balked. In 2013, Anchorage Democratic Sen. Berta Gardner proposed a 15 percent minimum tax, which was also rejected. The next significant effort to deal with the downside oil risk took place last spring, a year after the passage of SB 21.

A measure by Sen. Bert Stedman to cut the per-barrel credits in half and raise the minimum floor tax to 15 percent received a single hearing and was not given serious consideration. "As oil prices go down and credits go up, a higher minimum tax is needed to protect the state's share of its resource wealth from legacy fields," the Sitka Republican said.

Had the Legislature acted on some version of Stedman's bill, it would have greatly eased the credit imbalance that has alarmed the governor.

What's needed now is a thorough analysis of how the various credits play out in a low-price or moderate-price environment. Both supporters of the existing credit system and those who want changes ought to want credible research on this topic, because they are going to hear about it.

Lawmakers may have thought they could avoid discussion of oil taxes this year, but the subject will come up every time a public hearing takes place on a plan to cut state spending for this or that. It will be long the lines of "Why are you cutting (fill in the blank) when you are paying out more in oil tax credits than you are collecting in oil production taxes?"

There is no need to replay the SB 21 vs. ACES debate, but with the state running multi-billion-dollar deficits, the governor and lawmakers will need convincing answers to that question and a plan to do something about it.

Dermot Cole is an Alaska Dispatch News columnist and reporter who has observed the state's politics for decades.

The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)