JUNEAU — A divided state Senate late Wednesday passed an overhaul of Alaska’s oil tax structure, amid fears it will blow a hole in the state budget and give too much to oil companies with no guarantees.
“This may not work,” Sen. Gary Stevens, R-Kodiak, said of the bill. “I hope it does, but it may not work.”
Supporters say SB21 will make Alaska more competitive for additional investment dollars and should lead to new oil production. Alaska relies heavily on oil revenues to run, and production has been on a downward trend since the late 1980s. Higher prices in recent years have helped to mask the impact of the decline.
The bill passed 11-9, after hours of start-and-stop debate, with minority Sens. Johnny Ellis, Berta Gardner, Bill Wielechowski, Hollis French and Lyman Hoffman and majority Sens. Donny Olson, Dennis Egan, Bert Stedman and Stevens voting against it. Reconsideration was served, meaning the bill could be voted on again before going to the House. The regular session is scheduled to end in 3 ½ weeks.
Just one amendment of more than a dozen passed. It was a majority-backed proposal that would raise the base tax rate from the current 25 percent to 35 percent.
Failed amendments included a proposal put forth by Stevens to sunset provisions of the bill by 2017 — what supporters called an “escape clause” in case the state doesn’t see more production. Also unsuccessful were proposals offered by minority Democrats, some coming from their alternative tax plan, like requiring plans of development for leases or help financing oil processing facilities.
The bill up for debate had proposed a 35 percent tax rate through 2016, after which it would be 33 percent. Some senators felt more comfortable with the higher rate, seeing it as competitive while reducing the overall fiscal impact of the bill somewhat. Sen. Peter Micciche, R-Soldotna, said in an interview that passage of the amendment was critical to his support of the bill.
Prior fiscal analyses had indicated that if the tax rate were raised to and kept at 35 percent that could result in the state holding onto about $550 million more through 2019 than if the tax rate were stepped down, based on the last revenue forecast for prices and production. Overall, the state would still stand to lose billions of dollars under the bill through 2019, including an immediate hit next year, based on the forecast.
Parnell has said the state will be able to use savings to absorb the near-term hit, with the expectation that production will increase as a result of the tax break. The state has about $16 billion between two of its reserve funds.
Sen. Anna Fairclough, R-Eagle River, said the fiscal notes tried to provide the “worst case scenario.” She said a goal was to craft a fair, simpler, durable tax structure.
“I am proud of this bill,” said Sen. Cathy Giessel, R-Anchorage.
Sen. Pete Kelly, R-Fairbanks, acknowledged the revenue impact but said “we’re thinking about the future.” He said he doesn’t accept declining production as inevitable. To accept that is to accept “failure as our future,” he said.
Alaska’s existing tax structure features a 25 percent base tax rate and progressive surcharge triggered when a company’s production tax value hits $30 a barrel. The idea when it passed in 2007 was that the state would help oil companies on the front end with things such as tax credits and share profits on the back end when oil flowed and prices were high.
But companies have said the surcharge — credited with helping fatten state coffers in recent years — eats too deeply into their profits when oil prices were high, discouraging new investment. And Alaska’s Revenue commissioner has said he’s seen no evidence that tax credits to oil companies — which could top $1 billion next year — have led to increased production.
The bill voted on Wednesday — built off proposals advanced by Gov. Sean Parnell and Senate Resources — is aimed at getting more oil into the trans-Alaska pipeline. It eliminates the surcharge, and includes a $5 allowance for each taxable barrel of oil produced and a 20 percent tax break for oil from new fields and new oil from legacy fields, long the mainstays of Alaska’s oil industry.
Sen. Bert Stedman, R-Sitka, said the bill has good points but gives too much back in the legacy fields, which he and others said are very profitable for the companies. He worried Alaska wouldn’t reach a break-even point on the tax cut, and said if Alaska’s savings get too low, it could put the state’s AAA bond rating at risk. Sen. Bill Wielechowski, D-Anchorage, said the bill would push Alaska “off the fiscal cliff.” Stevens called it an “historic gamble.”
Sen. Lyman Hoffman, D-Bethel, said the vote could be the most important he’s taken in his political career.
Sen. Hollis French, D-Anchorage, said passage of the bill could ultimately lead to a state income tax or impact Alaskans’ prized Permanent Fund dividends. He said more committee hours were spent on crafting the current tax structure than on this bill.
Sen. Lesil McGuire, R-Anchorage, said she rejected any suggestion the bill was rushed through, and said she would be proud to be the 11th and deciding vote.