A Citizen’s Guide

JUNEAU — The oil industry never liked the 22.5 percent net profits tax the state passed last year, and now Gov. Sarah Palin wants that raised to 25 percent.

It’s part of a restructuring plan of the state’s oil production tax Palin announced Tuesday, but one that doesn’t sit well with the state’s largest operator, London-based BP PLC.

Doug Suttles, president for BP Exploration (Alaska) Inc., said the state needs to be mindful that too much change would discourage multimillion dollar investments.

Those investments are crucial to extending the life of North Slope production — already in a 6 percent annual decline — by several decades.

“The big enemy in Alaska is production decline,” he said. “The only way to offset it is investment, not just for exploration of new fields but existing fields and new technology.”

Palin stressed she is not anti-oil — indeed, her husband Todd just returned to his blue-collar production job for BP on the North Slope after a year’s leave — but believes the year-old tax needs to be restructured.

She wants lawmakers during a special session to start Oct. 18 in Juneau to fix a system she has called a failure and tainted by the federal corruption charges against former lawmakers in connection with the tax.

Palin’s announcement comes as two former lawmakers begin their federal trial today on corruption charges.

These bribery and extortion trials are linked to the passage of the oil tax and they have helped thrust the state’s political credibility into the national spotlight.

Palin noted the upcoming trial during her Tuesday news conference in Anchorage, but still stressed the need to fix a tax that she said “isn’t working as promised.”

Recent projections for the current Petroleum Profits Tax have the state falling $800 million short of what was predicted by former Gov. Frank Murkowski’s administration last year.

That’s nearly enough to fund the state’s entire public education budget for the current school year.

Palin says she wants a tax that is fair to the state, but also provides the industry with the right incentives for future the exploration and production.

“We must receive appropriate value for our oil,” she said. “It must be a clear and equitable share.”

But some lawmakers and industry leaders are skeptical, saying it’s too soon to revisit the tax lawmakers passed just last year.

Senate President Lyda Green, R-Wasilla, stood firm on her long-standing belief that a special session is not necessary to rewrite the state’s Petroleum Profits Tax.

“There is nothing that we are going to be doing that can’t wait until the regular session next year,” she said. “It’s way too early right now to say whether (PPT) is right or whether it isn’t right.”

Nevertheless, lawmakers will report next month to the capital. Palin earlier announced the special session, but on Tuesday explained the scope of what she wants lawmakers to consider and the venue for the session, which can last up to a month.

The current tax has a base rate of 22.5 percent on oil company profits, but also affords the companies various deductions and credits.

Palin said she wants lawmakers to replace the current net profits tax plan with what she calls a hybrid of a net and gross profits tax.

She is calling it Alaska’s Clear and Equitable Share, or ACES. Some of those changes include:

• Raising the tax rate from 22.5 percent to 25 percent on net profits, a figure some lawmakers pushed for last year.

• Not allowing deductions on facility repairs deemed to be from poor or negligent maintenance.

• A 10 percent gross-based floor tax on some of the older or “legacy” fields such as those in the North Slope.

• Eliminate some deductions, including those for retroactive investments, known as “claw backs.”

“What the governor is trying to do here is get a better return for the state and create an environment that encourages more investment, and for that I applaud her,” said House Speaker John Harris, R-Valdez.

“I do believe once we get the bill in a few weeks, we will want some expert advice as to what the effects of the bill will be on the budget, on revenue and on investment,” he said.

But House Minority Leader Beth Kerttula, D-Juneau, isn’t convinced that Palin’s plan will achieve the stated mission.

Kerttula said the changes don’t go far enough to keep the tax laws simple and understandable.

“Right off the bat, I’ve got some grave concerns,” she said. “We still don’t have much of a picture as to what deductions are going to be allowed.”

Senate Minority Leader Gene Therriault, R-North Pole, said he would like to see more details of Palin’s plan.

“This is more than rounding off the edges,” Therriault said. “There is a lot of detail we have yet to see.

“If they are true to their word and have run the numbers with good data, then what they proposed could ultimately result in a fair take for the state.”

Palin has not formally proposed the changes in a bill just yet; she expects to do that in a few weeks.

Palin had earlier said she wanted the special session to be held on the state’s road system, in places like Anchorage or Fairbanks, to allow the public greater access than in Juneau, the state capital that is only accessible by boat or airplane.

However, she deferred to the wishes of lawmakers to keep the session in Juneau, but has asked legislative leaders to consider holding committee hearings elsewhere.