A Citizen’s Guide

The split in the Alaska Legislature that led to the inability of lawmakers to approve a new oil tax system shouldn’t be the last that is heard on the topic this year. It’s imperative, in fact, that it isn’t the last word. That’s because the current taxation system isn’t serving Alaska well. There’s no disputing, even from the oil companies, that the tax laws now on the books aren’t good for the state.

But there’s no shortage of dispute over what the right numbers should be in the new tax system, which would raise revenue for the state based on the oil companies’ profits rather than their production levels. Gov. Frank Murkowski in February put forth his proposal to switch to this system, but the House and Senate each had a variety of ideas about what numbers to plug into that new system and, in the end, couldn’t agree.

But Alaska, after a period of cooling off of legislative heads, needs something done.

What does it mean that the current system isn’t serving Alaska well? It means that the state is missing out on hundreds of millions of dollars annually, depending on production levels and the price of oil and what rates, credits and deductions are used in the system.

Under the existing tax system, which contains a formula known as the economic limit factor, some oil fields don’t pay any production tax and others are taxed at an exceptionally low rate. And that’s the case even when those fields are profitable for their companies.

One of the poster children for the problem is the Kuparuk field, which in 2000 produced 212,000 barrels a day and, under the formula, had a 9 percent production tax at the time. In 2003 and with the field’s production declining, the tax rate fell to 3.75 percent. By 2007, the tax rate at Kuparuk is expected to fall to zero—even though the field is expected to be producing 125,000 barrels a day.

That isn’t good.

At a sustained price of $70 per barrel, more or less the price today, the existing tax system overall would bring the state just about $1 billion or so at today’s production levels.

At that price, however, the governor’s tax proposal would bring the state just over $1.4 billion more each year than under the current system. That’s about $2.5 billion total. The final version approved by the House but rejected by the Senate would have brought the state an additional $2.7 billion annually, for about $3.7 billion total. The Senate’s own version had revenue numbers slightly lower than the House’s.

Whichever version you look at, it’s a lot of money. And the dollar difference between the governor’s proposal, the House’s version and the one approved by the Senate is not inconsequential, either.

There’s no denying that the tax law needs repair—and soon.

Even so, the Senate did Alaska a favor, as the clock ran down on the legislative session Tuesday night, by rejecting the House’s version and thereby delaying implementation of the new system. The Senate, by a narrow margin, was essentially asking for time to determine how the proposed new oil tax system would fit with the proposed contract on fiscal terms for construction of a natural gas pipeline from the North Slope. That document, at several hundreds pages, hadn’t been made public at the time, and several legislators rightly feared making an oil tax decision without seeing the gas agreement that the governor has reached with BP, Exxon Mobil and ConocoPhillips. And there’s no question that oil and gas are linked, since executives of those companies have said repeatedly that they need an oil tax system locked into the gas contract for 30 years so they don’t have to worry about tax changes affecting their companies’ bottom lines.

What about the bottom line for Alaska in all this? Legislators must capitalize on the knowledge they have gained in the past few months, put political views aside when their arguments have run their course, and approve a new tax system this year—even though they’ve had ample opportunity over the past several years to do so. And they should approve a new tax system whether or not they ultimately approve of the gas pipeline agreement.