A Citizen’s Guide

EDITOR’S NOTE: This is the last of three stories aimed at informing readers about the debate over oil taxation, which is the subject of the special legislative session that began Thursday in Juneau.

Gov. Sarah Palin’s plan for getting a gas pipeline had no shortage of critics when she rolled it our this year. The major oil producers lobbied hard against it, and some lawmakers suggested it simply wouldn’t work.

But Palin stuck to her plan and got it through.

In the coming weeks, the governor will no doubt face a similar challenge to convince lawmakers that her plan for rewriting the state’s oil production tax is the right one.

Palin introduced a draft of her tax plan, which she calls “Alaska’s Clear and Equitable Share,” earlier this month and already faces opposition from oil companies, who warn of a chill on company investment, and from lawmakers, who question her tax rate, the tax structure, or the wisdom of changing the tax at all.

“Too much change, too quickly, is going to frighten capital away from Alaska,” said Rep. Jay Ramras, a Fairbanks Republican.

Less tax, not more

The oil industry has made its position on ACES clear through advertisements, public talks, and media outreach.

“Higher taxes results in lower investment,” said Doug Suttles, the head of BP Exploration (Alaska). Investment, he said, is badly needed to keep the oil flowing.

North Slope oil production is less than half what it was at its peak in 1988 and is dropping at a rate of about 5 percent a year. The Department of Revenue estimates that half of North Slope production 10 years from now will come from fields that are under development or evaluation.

Oil companies and trade groups stress that Alaska benefits from oil production not just through production tax but also through royalty payments, other taxes, and jobs. Raising production taxes at the expense of long-term investment would be shortsighted, they say.

“There are no other revenues that will come into the state that can match the revenues that oil and gas provide,” said Marilyn Crockett, head of the Alaska Oil and Gas Association, a trade group representing the industry.

A tax based on oil company profits, like the current petroleum production tax or Palin’s ACES plan, does provide incentives for investment, said Kevin Mitchell, ConocoPhillips Alaska’s vice president of finance and administration. But the tax rate is already too high and raising it higher could make projects that are marginal now no longer pencil out.

“Increased taxes are bad for investment,” he said. “Investment returns will deteriorate.”

BP spokesman Daren Beaudo suggested Palin was heading the wrong direction with ACES.

“In order to stimulate more investment,” he said, “the state ought to think about lowering taxes instead of increasing them.”

Debates large and small

Oil companies don’t vote, but lawmakers do, and the range of legislative opinions on ACES is wide.

Some want a higher tax rate, while others are leery of a tax based on oil company profits rather than on gross oil production.

Still others are just getting up to speed.

“It’s a big, 46-page bill,” said Rep. Scott Kawasaki, a Fairbanks Democrat who was elected last year and wasn’t in office for the previous oil tax debate.

One major debate in the coming weeks will surely be about the structure of the state’s oil tax. Palin said she favored a gross tax for its simplicity but went with a net tax in ACES because it was the only way to encourage investment. (ACES does include a gross floor on certain fields.)

Sen. Gene Therriault, a North Pole Republican who last year voted against the PPT, said he also favored a gross tax and went through the same arguments as Palin. Crafting a gross tax that meets the state’s goals, he concluded, was “easier said than done.”

But some lawmakers are still pushing the idea. They argue a net tax is harder to administer and leaves the state vulnerable to creative accounting from oil companies.

Rep. David Guttenberg, a Fairbanks Democrat, said Palin will have to convince him a net profits tax is better.

“If she can figure out a way to prevent this from being gamed by the accountants and the lawyers, then it’s something that I definitely will look at,” he said.

Another debate will focus on the tax rate.

Some lawmakers like Palin’s idea, which increases the base tax rate to 25 percent from 22.5 percent, while others want the tax to be even higher.

Rep. John Coghill, a North Pole Republican, said he didn’t mind going to 25 percent as long as valuable incentives were included.

“If it dries up the pipeline, what have we done?” he said.

Other lively debates will likely focus on a provision in ACES blocking oil companies from taking deductions on repairs to poorly maintained infrastructure and on a provision exempting certain auditors from the state’s pay scale. Some argue exempting the auditors would make them subject to the whim of the governor.

A number of lawmakers, including Senate President Lyda Green, a Wasilla Republican, argue the new tax should be left alone for now and given a chance to work.

New faces

State lawmakers got an introduction to profits-based taxes, progressive tax rates, and government take figures last year when then-Gov. Frank Murkowski pushed through a complete overhaul of the state’s oil production tax.

But that was 14 months ago, and more than a fifth of the 60 House and Senate seats have since changed hands. A dozen lawmakers were voted out or didn’t run again, and one, former Republican Rep. Vic Kohring of Wasilla, stepped down in June in the face of federal bribery charges.

Leadership in the state Senate has also changed hands. Green is at the top of a bipartisan coalition composed of nine Democrats and six Republicans.

One of those Republicans, Sen. John Cowdery of Anchorage, decided to skip the special session so as not to be a distraction. His name came up in conjunction with the federal investigation, but he has not been charged with any crime.

On previous issues and now with ACES, Palin is more aligned with Therriault, the Senate minority leader, than with Green.

Contact staff writer Stefan Milkowski at 459-7577.