Alaska, facing a deep deficit, suffers by oil tax law

The price of crude oil is inching up from a low in January of $32 a barrel for West Texas Intermediate to, as of this writing, $51 a barrel while, on the European market, Brent Crude is $53 a barrel.

Under the old Alaska's Clear and Equitable Share, or ACES, tax system the rising price of oil would mean more production taxes for Alaska and, should, if it continues, eventually end our financial crisis. Before you start practicing a chorus of "Happy Days are Here Again," thinking Alaska's fiscal crisis is almost over, we need to remind ourselves of one sobering thought: SB 21 and new oil.

SB 21, what the oil industry calls the More Alaska Production Act, or MAPA, may be the most complex bill in Alaska's short legislative history. You'd think the bill was drafted by tax lawyers for ConocoPhillips, ExxonMobil and BP. The legislation rewrote Alaska's oil taxation laws and, after it passed, a referendum to recall the legislation failed in the face of massive advertising by the oil industry.

In a 2014 analysis , Professor Emeritus Scott Goldsmith of the Institute of Social and Economic Research at the University of Alaska Anchorage, pointed out that at low oil prices, SB 21 taxation would produce more state taxes than the previous ACES tax system. That's been true. Then he asks: "MAPA (SB 21) would actually produce more revenues than ACES in future years (with low oil prices)…If that is the case, why would producers prefer MAPA to ACES?"

He offers a number of possible answers, the most important being the binary distinction to how "old" oil, is taxed verses how "new" oil is taxed.  Old oil is from an existing pre-SB 21 well. New oil, according to SB 21 is "a new unit, a new participating area in an existing unit, or an extension of an existing accumulation." In other words, drill a new well into an old unit and pump the oil from the new well instead of the old well and you have "new" oil.

In a recent ADN opinion piece, Tim Bradner said oil tax credits have largely worked to stimulate new production.

That oil, however, is new oil and eligible for a gross value reduction in tax liability, which significantly reduces taxes, in some cases to almost nothing.


Goldsmith gives an example. With oil at $100 per barrel the ACES tax would be between 10 percent and 30 percent, rising to 51 percent if oil rose to $101 per barrel. With SB 21, the tax would be between 5 percent and 15 percent with no progressive increase above $100 per barrel. (Both cases factor in the lease cost per barrel.)

For the oil industry, SB 21 makes marginal fields more attractive to develop at high oil prices (no windfall taxes) and makes all fields much more profitable because a new well into an old field pumps new oil with a lower tax rate at mid- to high-prices. What this all means to Alaska is oil prices have to reach around $70 per barrel before new oil production is significantly taxed  and above that, the windfall goes to the oil companies, not to the state.

The North Slope is gradually shifting from production of old oil to production of new oil and the tax liability will also gradually change: more money for oil companies, less for the state of Alaska. With SB 21, Alaska sold its soul and outsourced its vital public services to the devil.

The old oil-new oil tax discrepancy is what this Legislature should have been working on as part of a package to keep Alaska solvent. Reps. Les Gara and David Guttenburg have been among the few in the Legislature to champion revising the oil production tax.  Alas, many in the Legislature are operating on the principle "what's good for Big Oil is what's good for Alaska." It will take another Legislature to stabilize Alaska's public services and use visionary oil taxation to transition this state from heavy reliance on fossil fuel taxes to tidal, geothermal, and other stable, predictable, and controllable energy sources.

Maintain the status quo dependence on oil and Alaska will be a wasteland of rusting hulks of oil rigs and a bullet-riddled trans-Alaska pipeline reminiscent of early 20th century gold dredges along the Steese Highway and derelict canneries in Southeast. Transfer oil wealth into renewable energy, and Alaska will be the model for the world: a place that reduced carbon emissions and a modern sustainable-energy society that attracted tax-paying information-age companies and light industry with cheap energy.

Alan Boraas is a professor of anthropology at Kenai Peninsula College.