A Citizen’s Guide

JUNEAU—Pedro van Meurs, the governor’s lead advisor on oil and gas issues, argued Monday that the oil production tax passed by the state House was overly complicated, would not ensure strong industry investment in Alaska, and could force the state to pick up costs associated with repairs to North Slope infrastructure.

“There is great virtue in simplicity,” he told the Senate committee reviewing the tax. “Why not go back and rethink this?”

The bill passed by the House is based on the governor’s petroleum profits tax, or PPT, but includes a mechanism that would adjust the tax rate according to how much an oil company invested per unit of production.

Van Meurs credited the House for changes to the bill that would simplify the tax payment method and limit costs the companies could deduct, but said the formula for adjusting the tax rate had “fundamental problems.”

Under the formula, a company that makes no capital investments in the state would pay a 25 percent tax rate.

One that invested more than $10 per barrel of oil at current prices would pay a tax rate of only 20 percent. Additional tax would be imposed at prices above $40 per barrel.

Van Meurs said the formula was not aggressive enough.

To achieve the lowest tax rate, a company would only have to invest a little over 20 percent of its profits in Alaska.

Governments in other places with oil and gas resources usually aim to have 70 to 90 percent of profits reinvested, he said.

Because the bill would grant a valuable reduction in tax rate for capital investments, it could encourage companies to make unnecessary investments that would not significantly increase oil production, he argued. The bill does not include adjustments for inflation and could in theory allow a company to make fewer investments and produce less oil each year while still lowering its tax rate.

It could also leave the state with the tab for repairs to North Slope infrastructure, according to van Meurs.

He estimated that under the new bill, the state would end up paying 80 to 90 percent of the cost of repairs to pipelines at Prudhoe Bay, which BP announced Sunday it was shutting down because of corrosion problems.

His comments come as lawmakers push to replace the state’s current oil production tax, which the administration and lawmakers agree does not tax companies enough. Twenty-nine of 40 state representatives voted for the modified PPT on Sunday while others support a simplified tax system based on gross production. The governor’s original proposal has found few champions.

Van Meurs questioned why.

“It seems that either we prefer something that is very simple that doesn’t work or something complex that doesn’t work,” he said. “But something simple that works doesn’t seem to get the votes.”

Van Meurs’ criticism did not stop lawmakers from hoping a tax rewrite would make it through the Legislature before the end of the special session Aug. 10.

“We’re purpose driven at this point,” said Sen. Ralph Seekins, R-Fairbanks, who chairs the Senate Special Committee on Natural Gas Development, which is reviewing the bill.

Seekins withheld judgment on the House version but said the committee could end up considering a bill without the variable tax rate based on investment.

He said he looked forward to seeing more analysis of the House version.

“I’m looking for anything that works to get us the revenue,” he said.

Committee member Sen. Gary Wilken, R-Fairbanks, said he favored pushing forward with the House’s work but was concerned about the complexity of the bill.

He said he was “really amazed” that the formula had not been adjusted for inflation.

Rep. David Guttenberg, D-Fairbanks, who voted against the bill and said he preferred a tax based on gross production, said the House received minimal analysis from hired consultants on the proposal before passing it.

“We never had an opportunity to sit down the consultants to talk about what it does,” he said.

Van Meurs did not testify before the House on the bill.

Rep. Mike Kelly, R-Fairbanks, who supported the bill, admitted it could be “tweaked and improved” but said he and others would try today to further explain the reasoning behind the bill to the Senate committee.

“I hope they don’t pitch it over the rail and start over,” he said, “especially at this late hour.”

Kelly said he was concerned the Senate would approve a bill the House or governor did not support.

Revenue Commissioner Bill Corbus said Monday he didn’t know how the administration would address the House version of the bill.

“The administration is supporting it’s original 20-20,” he said.

Stefan Milkowski can be reached at smilkowski@newsminer.com or 459-7577.