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Analysis puts price of oil tax plan at up to $1.3B

Published on NewsOK Modified: March 13, 2013 at 6:32 pm •  Published: March 13, 2013

JUNEAU, Alaska (AP) — A Senate proposal to overhaul Alaska's oil tax structure could cost the state up to $1.3 billion next year, hundreds of millions more than plans put forth by Gov. Sean Parnell and a different Senate committee, according to an analysis released Wednesday.

Sens. Lyman Hoffman and Click Bishop laughed as an economist began discussing the potential impact of the Senate Finance Committee's rewrite of SB21. Hoffman, D-Bethel, later called the effect on state revenue and the operating budget "staggering" and said it would be detrimental to the budget at a time when the state is already expecting to dip into savings to cover costs for the current fiscal year.

Co-chair Kevin Meyer said the committee is right to be concerned about any hit to the treasury. "But I would just remind people the reason why we have a deficit, even this year, is because we have no production, and the production is declining," he said.

Supporters see cutting taxes as a way to attract more investment and spur new production. Production has been on a downward trend since the late 1980s, but higher prices in recent years have helped mask the impact of that. Factors contributing to this year's anticipated budget hole include lower-than-expected prices and increased capital spending by oil companies, which can help offset their tax liability.

The fiscal note, billed as a draft, is based on the Department of Revenue's fall forecast for oil prices and production. The forecast predicted a continued net decline in North Slope production through 2022 and prices ranging between $109 and $118 a barrel through 2019.

The note indicates a negative fiscal impact, a mix of the effect on revenue and the operating budget, of between $1.1 billion and about $1.3 billion next fiscal year. That would rise to between $1.4 billion and about $1.8 billion by 2017.

Parnell's plan would have had a negative fiscal impact of $900 million next fiscal year, dipping to $550 million for 2015 and rising to about $1.1 billion by 2018. The Senate Resources bill had a negative fiscal impact of $800 million to $900 million next year, dipping to between $350 million and $550 million in 2015 and rising to as much as $1 billion by 2019.

Like the other plans, the Senate Finance rewrite unveiled Tuesday as a work-in-progress would eliminate the progressive surcharge triggered when a company's production tax value hits $30 a barrel. The surcharge has been credited with helping fatten state coffers in recent years, but companies have said it eats too deeply into their profits when oil prices are high, discouraging new investment.

The proposal would raise the base tax rate from the current 25 percent to 30 percent and add a $5-per-barrel credit for oil produced. It also would provide a 10-year, 20 percent tax break for oil from new fields and new oil from legacy fields. Bill drafters inadvertently listed the break at 30 percent, though that was expected to be changed.

Consultants have told Senate Finance the proposal would make Alaska more competitive for additional investment, a major goal of the effort. Industry representatives, who have had mixed reactions to prior iterations of the bill, were invited to testify on the latest version Wednesday. None did.

Meyer, R-Anchorage, said he doesn't blame them. If they had said they liked the bill, some might have argued the proposal doesn't go far enough, and if they said they didn't like it, people might have thought they were just being greedy, he said.

"I think we're at a point now where we have to decide what we think's best after hearing from everybody," Meyer said after an afternoon hearing.

Earlier in the day, he said if the state doesn't see increased production at the end of this, "then we're wasting our time here."

The administration provided three possible production scenarios, billed as hypothetical but realistic. They were a new 50-million-barrel field developed by a small producer, the addition of new drill rigs to current development plans, and construction of a new drill pad by an existing operator in the legacy fields. Mike Pawlowski, with the Department of Revenue, said the addition of one small field wouldn't "move the needle" much but the other scenarios would help.

Barry Pulliam, a consultant to the administration, said there's no way to forecast, with a high degree of accuracy, whether the proposal would attract the kind of investment needed to offset any revenue losses. With the current proposal, he said he believes the state should see a pretty good response. If it doesn't, the state can always revisit the issue, but he noted the state has a reputation for instability, for its tendency to tinker with its tax structure.

Co-chair Pete Kelly, R-Fairbanks, said it's the committee's intent to get this right, so there's no need to come back.

During the morning hearing, Kelly said because the state "probably took" too much from oil companies "who wanted to produce an economy up here and make a profit in the process, we have to now look at giving some of that money back so that they'll stay here and continue to invest. And as we give it back, we can't measure it against what government wants. We have to measure it against what the people want," like jobs.

Bishop echoed the desire to get it right, saying once the state gives something up, it's hard to get it back.

In an interview, Bishop, R-Fairbanks, said it's not fair to Alaskans or to the industry to have a "do-over" on taxes every seven or eight years. The current tax structure was passed in 2007.

He said the issue weighs heavily on him.

"I would love to hear more commitment from the industry, you know? We've asked them seven-different-ways-from-Sunday," he said, adding: "You would think that they could man up and be a little bolder in their comments. We're having to show our cards."


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