A Citizen’s Guide

Part 3 of 3

The debate about oil taxes and the North Slope natural gas pipeline has many unknowns and uncertainties that should give legislators and the public reason to be cautious.

Yet there are a few things that are known but that haven’t gotten much attention in the committee rooms and that Alaskans should acknowledge as they follow the debate in Juneau.

Chief among those known items is the simple observation that the oil industry provides nearly 90 percent of Alaska’s annual general fund revenue and that Alaskans pay no state income tax or sales tax because of it. How many Alaskans have stepped to the microphone in a Capitol committee hearing room to say they are willing to pay a personal income tax or sales tax and not worry about declining oil production? Not too many, we bet, if there have been any at all.

It’s equally important to realize that oil industry executives have accepted the state’s view that the current oil taxation system, based on production rates and with its outdated economic limit factor, is no longer working well for Alaska. The problem is an obvious one in that some profitable fields under the ELF system have seen their tax rates fall to near zero. By next year, the Kuparuk field on the North Slope, for example, will pay no state production tax despite producing about 125,000 barrels per day. By 2010, all North Slope fields outside of Prudhoe Bay will be paying an average tax rate of 1.5 percent, well below the 12 percent historical average for all Alaska fields.

And it’s also worth a reminder that while Alaska possesses great quantities of oil and gas, those resources are worth little without the industry coming into the state to extract them. Whether it’s BP, Exxon Mobil or ConocoPhillips—the three companies at the center of the current oil tax and natural gas pipeline debate—or some other company, the resources won’t come out of the ground and the revenue into the state treasury and into Alaskans’ pockets via the permanent fund dividend without industry’s work, people and money.

Alaskans need to acknowledge these main points even while supporting the move to higher taxes on the industry, because there is a point—a point that continues to be debated—at which oil industry interest in Alaska would be lessened. The demand for more tax revenue from the oil companies is appropriate, but it cannot be made blindly. The Daily News-Miner, in arriving at its opinions, recognizes these realities but nevertheless gives great weight to the many uncertainties that exist regarding the proposed oil tax legislation and the expected financial agreement with BP, Exxon Mobil and ConocoPhillips for construction and operation of a natural gas pipeline from the North Slope to the Lower 48.

Here are our primary recommendations, restated from our Wednesday editorial and in brief:

• A base tax rate of no more than 22.5 percent on oil as part of the new profit-based oil tax system, recognizing that this number was offered in the Senate as a compromise and that it falls within the range offered by consultants to the Legislature and governor.

That tax rate should be coupled with modest progressivity factor of 0.2 of a percentage point, as included in the tax bill approved by the Senate, thereby allowing the state to share reasonably in the revenue from high oil prices that also greatly benefit the oil companies.

• The House should consider returning the legislation to a 20 percent tax credit on capital expenditures for exploration and development if the governor’s concerns about the Senate’s 25 percent tax credit prove valid. The governor, who proposed a 20 percent credit, said a higher rate could create situations in which the state would receive zero tax revenue from future fields.

• The House should correct what appears to be a serious error regarding the tax rate for gas as included in the Senate version of the oil tax bill. The Senate’s version would apply a tax rate to only one-third of the value of the taxable gas, after deductions. The concern here is that the state could incur a negative tax value on gas in some situations.

• The Legislature should not succumb to pressure to finish its work on the oil tax by the Tuesday end of the regular legislative session. The work should continue in a special session to provide additional time for more analysis, to allow legislators to consider the oil tax legislation on its own, and to reduce the vote-swapping and vote-pressuring that will occur if the oil tax bill is voted upon alongside other, unrelated, legislation at the end of the session.

• The Legislature should reject the governor’s request to lock the new oil tax system into the expected natural gas pipeline agreement for 30 years without the state having the ability to unilaterally reopen the contract under certain conditions. A 15-year lock-in of the oil tax system without a reopener could be considered.

We also make these recommendations:

• The oil tax legislation should not include a retroactive implementation of the tax. Imposing a tax retroactively to April 1 of this year as the Senate’s version of the bill does is no more than a money grab by the state and is fundamentally unfair. The tax legislation should have an implementation date that follows the legislation’s date of approval.

• The Legislature should retain measures in the bill that will ensure and encourage the exploration, development and production of oil and natural gas in many areas of the state, including gas in the Nenana Basin and oil and gas on land within the Yukon Flats National Wildlife Refuge that is being sought by Doyon Ltd. through an exchange of lands owned by Doyon and by the federal government within the refuge.

• The Legislature should require, either in the oil tax bill or in a separate bill, that subsequent Legislatures produce an annual report to the public on the effectiveness of the new oil tax system to determine whether the system is working as the Legislature intended and to recommend any changes.

Prior to arriving at these views, members of the Daily News-Miner’s editorial board followed the legislative hearings, reviewed the written record, and had several separate meetings and telephone conferences—in some instances multiple times—with oil company executives, legislators, third parties, members of the governor’s administration, the governor’s consultant, and the governor himself. Individual members of the editorial board also conducted their own research and had their own discussions with many of the key players. And board members disagreed with each other at times.

In conclusion, we believe that Alaskans have come to understand that the current oil tax system must be changed soon, that they want the oil industry to enhance investment in the state so as to increase North Slope oil production, and that they want the natural gas pipeline negotiations to succeed.

We believe, however, that Alaskans want assurance that these things will be done right. And we believe that Alaskans sense that the Legislature has one chance to accomplish that on their behalf.

Finally, we believe that Alaskans will be extremely patient with the Legislature as it works to achieve an outcome on oil and natural gas that is in the long-term best interest of this state and its people.

It is the only way.