A Citizen’s Guide

Despite the promise in the proposed gas pipeline contract for an oil tax freeze, lawmakers last week passed an oil tax assuming, to some extent, that they would be able to change it down the road.

One big issue was how the credits for future natural gas development would affect the tax.

On the last day of the special session, Democratic lawmakers made impassioned pleas to remove the bill’s credits for gas, which they said would eat into tax revenue. Others downplayed the threat.

Sen. Ralph Seekins, a Republican from Fairbanks and chairman of a special committee on gas development, said he wasn’t worried about the potential effects of the gas credits in part because the bill wasn’t set in stone. The state could revise it in the next few years if needed, he said.

Rep. Jay Ramras, another Republican from Fairbanks, echoed the idea.

“I don’t think this bill goes 10 years untouched,” he said.

Other things might also need tweaking in years to come.

A last-minute provision that would force the oil companies to pay all the costs on the first 30 cents of capital costs per barrel isn’t adjusted for inflation. The provision was touted as protecting the state from paying for costs that could be the oil companies’ fault, such as those relating to the Prudhoe Bay shutdown.

In real terms, the companies will pay for a smaller amount of capital investment before state incentives kick in, as inflation cuts into the purchasing power of that 30 cents.

The progressivity feature, which increases the tax rate as prices rise, isn’t adjusted for inflation either. According to Dan Dickinson, a consultant for the Department of Revenue, it’s unclear whether the tax rates will rise or fall in real terms over time.

Democrats questioned why provisions that might be problematic down the line—like incentives for gas—weren’t eliminated before the bill became law.

“Was it clumsiness?,” asked Rep. Eric Croft of Anchorage.

Dickinson said it wasn’t by chance that the smaller things—like inflation adjusters—were left in. Lawmakers were aware of the effects of inflation, but figured they were best adjusted later, he said.

There’s even a provision in the bill calling for a report to be done by 2011 on how well the tax is working and what should be changed in the tax law.

In essence, Dickinson acknowledged, the lawmakers’ approach to the tax bill sends the message that they’re not ready for an oil tax lock-in just yet.