A Citizen’s Guide

EDITOR’S NOTE: This is the first of three stories aimed at getting readers ready for the special session on oil production taxes. Check back Thursday and Friday for additional stories.

Lawmakers are studying it, the governor is traveling the state explaining it, and the oil industry is already fighting it.

Gov. Sarah Palin’s new oil tax plan will get a thorough vetting starting Thursday when the Alaska Legislature gavels in for a special session to revisit the state’s oil production tax.

Palin says the current tax — passed by lawmakers just 14 months ago — isn’t working as planned and needs to be fixed. She wants to increase the tax rate and get rid of a number of tax deductions allowed to oil companies.

But some lawmakers are calling the rewrite premature, and the oil industry is arguing a tax increase will make the state less attractive for investment.

Underlying the debate is the state’s dependence on the industry. Taxes and royalties from oil production make up the vast majority of state revenues, and oil production is falling fast.

The goal with the new tax plan, Palin explained last month, is to get a fair share of the value of the state’s resource without scaring off the industry.

Here’s a look at the road leading to Thursday’s special session, and how Palin’s tax plan differs from the tax in place.

Not working as promised

When the first tax returns from the new Petroleum Production Tax came in this spring, the Department of Revenue was somewhat stumped. The payments brought in more than the old tax would have, but were still more than $100 million short, and it wasn’t clear why.

The new tax was a radical departure from the old. Instead of taxing companies based on how many barrels of oil they produced, and the price of the oil, the new tax took a percentage of oil company profits after the companies had deducted their costs.

The goal was to take in a greater share of the wealth when oil prices were high and encourage investment in the state with tax deductions and credits.

It quickly became clear that the new tax had its drawbacks.

Because the tax allowed companies to deduct their costs, tax revenues became a lot harder to predict.

The tax was also hard to administer. The Department of Revenue struggled to write the regulations implementing the tax and find the auditors it needed to check tax returns.

In August, the department spelled out various challenges in a five-page report. The cost of producing a barrel of oil was much higher than expected and rising fast, the report said, resulting in less revenue for the state.

The report estimated that in fiscal year 2008, the state would bring in just $250 million more than it would have under the old tax — not the $1 billion more expected when lawmakers passed the new tax. And if the price of oil fell below $48 a barrel, the state would have been better off with the old tax.

Palin’s administration wasn’t changing the tax to fill the revenue gap, but because the projected revenues were so far off, said Revenue Commissioner Pat Galvin. “It calls into question whether legislators would have made the same choice.”

Another problem with the tax, Palin said, is that it was passed under an ethical cloud. Several lawmakers were indicted on charges of bribery relating to the tax and oil field services company VECO Corp., and there was public concern the tax was tainted, she said.

Kicking and screaming

Palin set an aggressive schedule for crafting a new tax plan. She hired a host of consultants to advise her and, in early September, rolled out a plan she said would make the tax easier to administer and ensure the state got an adequate share of the oil wealth.

Alaska’s Clear and Equitable Share, or ACES, keeps the basic structure of the PPT. Palin said she had favored a simpler tax system based on gross oil production and was dragged “kicking and screaming” to the net profits tax because it was the only way to get adequate revenues and still encourage investment.

But ACES makes a number of significant changes to the tax. It boosts the tax rate from 22.5 percent to 25 percent and imposes a tax floor based on gross production for certain oil fields.

It lowers how quickly the tax rate increases as oil prices go up, but it bumps down the price at which the rate increase kicks in.

ACES also gets rid of a number of deductions currently allowed oil companies. Most notably, it blocks oil companies from claiming tax credits and deductions on repairs made to oil field infrastructure that failed from poor maintenance.

It also gets rid of credits for investments made in previous years, and makes it so companies have to spread out each year’s capital credits over two years.

ACES differs from PPT in lots of ways, said ConocoPhillips Alaska vice president Kevin Mitchell, “and all of them serve to increase taxes.”

Palin’s proposal would also demand greater information sharing from companies, change how the state could use that information, and make certain tax auditors exempt from the state pay scale.

Contact staff writer Stefan Milkowski at 459-7577.