OIL TAXES: THE GREAT DEBATE

The proposed changes in oil taxes, and later gas pipeline proposals, are the most important issues that will be before the legislature in many decades. The governor has proposed changes to the oil tax, and those changes are being hotly debated in both House and Senate Committees.

I am not on the House Resource or House Finance Committee, so therefore have not been a direct party to the debate. I have sat in, however, on some of the briefings. When the oil tax bill, and later the gas pipeline bill, reaches the House floor, I’ll have to cast what will undoubtedly be the most important vote I’ll likely cast in my entire legislative career. At this point, there is no way to know exactly what form the bills will be when they become finally become available for a House floor vote.

I do, however, have concerns about the best way to structure a new oil tax. The producers want fiscal certainty as the foundation of future explorations and operations. That makes sense. And, obviously, they want the tax rate to be as low as they can negotiate. That’s only good business. On the other hand, the state wants to obtain the maximum possible in revenue from oil – without “killing the goose that laid the golden egg.” The appropriate tax must be a “win-win” for all parties concerned, and most importantly the people and future of Alaska.

Without oil production, it doesn’t matter how high the tax rate - i.e. 100% of zero equals zero. Production is as important as tax rate. So, the oil tax must be crafted so there is proper incentive for exploration and for increased production. We also need to encourage reinvestment of oil profit back into Alaska. We are in competition with oil producing nations around the world. Our producers are multi-national companies, and they will go where the can make the highest profit with the least amount of problems. Alaska isn’t the Lone Ranger when it comes to oil and gas natural resources. Alaska must compete in the world market.

That said, I am concerned that the tax rate is being computed on the basis of the producer’s net profit, rather than gross. We will soon be filing our personal federal income taxes – and most of us will be attempting to demonstrate to the government how little we made, not how much. We want our tax bill to be as low as we can get away with. It would seem that the oil producers could act in a similar manner.

It could be difficult for the state to get a grasp on legitimate expenses that affect a net profit, especially if expenses are inflated in Alaska, and made up for in some foreign nation. I'm concerned that Alaska could be at a disadvantage in getting savvy auditors at a price Alaska can afford, as compared to tax experts hired with big bucks from the producers. I’m told that the producer’s federal tax returns will be available to state auditors, so maybe there isn’t as big a problem as I fear. Hope springs eternal.

The governor has proposed a 20% tax (he had previously wanted 25%), and the producers accepted 20%. The question for the legislature must be whether the 20% was an opening low ball figure for negotiation, or it was a rock solid take-it-or-leave percentage. I suspect there’s some wiggle room for negotiation by the legislature. That should be reasonably expected from both the governor and the producers.

I do like the concept of the sliding tax rate scale proposed by the House Resource Committee, but the percentages on that scale are debatable. The question is, how far should the rate slide in both directions? I would also like to see a bottom percentage that would be in place, however low the price of oil might drop, so that at least some amount of revenue always accrues to the state,

I must say it’s disturbing that we are in the position of negotiating an oil tax, with the gas pipeline proposal hidden from view. The governor and the producers know all about the presumptive gas pipeline deal, but the legislature does not. That puts the legislature in the position of attempting to represent our constituents without having all the cards on the table, and I don’t like it. It stinks.

We have some very good people in the both the House and the Senate negotiating the oil tax question. They are asking some of the right questions, and are coming up with some sensible proposals.

When push comes to shove on the oil tax question, I’ll have to push a “Yes” or “No” button and vote for whatever comes to the House floor, remembering that the governor proposes and the legislature disposes. Hopefully, my constituents will weigh in on the issues, and communicate with me and help me make represent my district in the best manner possible under the circumstances. The better the communication the better the representation.