A Citizen’s Guide

JUNEAU—The Senate Resources Committee completed work on Gov. Frank Murkowski’s oil tax legislation Wednesday, passing a version significantly different than one recommended by the administration.

The committee spent five weeks poring over the governor’s proposal to revamp the state’s oil taxes, emerging with what amounts to a thorough rewrite.

Among the biggest changes in the Senate version is a 25 percent base tax rate that increases incrementally when the price of oil rises above $40 a barrel. The committee’s version also reduces many of the lucrative incentives the governor claims are needed to encourage exploration and investment.

The governor introduced legislation in February scrapping the state’s current production tax on oil in favor of a 20 percent tax on companies’ profits after expenses.

Murkowski’s version of the bill gave companies a 20 percent deduction from their taxable income for making new investment in oil field development and included a series of other credits and deductions designed to encourage exploration. Murkowski and oil industry leaders have been on the offense since the legislation was introduced, warning lawmakers not to make significant changes or they would risk endangering a multibillion-dollar deal to develop North Slope natural gas. The governor has said oil tax reform and the gas deal are a package that cannot be altered nor separated.

The governor’s bill has remained mostly intact on the House of Representatives side, but Senate Resources Chair Tom Wagoner, R-Kenai, has given it thorough going over.

Wagoner said he expected to release the bill Thursday. First, though, he wants to meet with the leadership of the Senate Finance Committee to make sure they consider his bill and not a competing version moving through the House.

“If I don’t feel comfortable, I won’t transmit it,” he said.

Wagoner said there are major differences between the version of the bill his committee put together and the one being considered by the House.

Among the other changes, the Senate version replaces a $73 million standard deduction with a tax-free production allowance of 5,000 barrels for each company.

Under the governor’s bill, oil companies could deduct the full value of oil field investment they made since 2001. The Senate version replaces that with a provision allowing oil companies to deduct $1 of previous investment for every $2 of new investment. The Senate version also includes a provision to capture more revenue for the state when prices peak. The provision adds 2 percentage points to the base tax rate when prices go over $40 a barrel, and the rate increases by another 2 percentage points for each additional $10 increase in price.

Senate Resources members also made several changes to the wording of the bill to close potential loopholes to reduce the possibility of the state losing money to aggressive accounting practices by the oil industry.

Senate President Ben Stevens, R-Anchorage, objected to the changes made in the Resources committee, of which he is a member. Stevens said the higher base tax rate and the incremental increase risk damaging the oil industry’s willingness to invest in the state.

“We’re in unknown territory,” Stevens said. “The 25 percent tax rate is too onerous and I’m not willing to take that risk.”

Sen. Ralph Seekins echoed those concerns. The Fairbanks Republican said the April 1, 2006, start date in the Senate version would be retroactive and unfair to the industry.

Seekins said he would prefer to see the base tax rate drop down to about 22 percent. He said he would also like to see the rate increase halved to 1 percent.

The bill passed on a vote of 5-2. Stevens and Seekins voted no.

The bill could still be changed in Senate Finance, and Wagoner acknowledged that retaining the 25 percent tax rate, along with some of the other controversial provisions, would be a challenge.

The Senate will have to come up with something that House members will agree on or the bill will have to be hashed out in a joint conference committee.

“Who knows what happens to this bill once it goes through the conference process,” Wagoner said.

The bills are Senate Bill 305 and House Bill 488.

Staff writer R.A. Dillon can be reached at (907) 463-4893 or rdillon@newsminer.com.