Prior to the current legislative session, Governor Bill Walker cited as one of his key objectives the need to end cash credits for new oil exploration and development to the oil industry. The reason for ending the credits was not that they didn’t work, but that the State could no longer afford them due to our major deficit resulting from the crash of oil prices.
The Senate version of HB 111 accomplishes that objective by eliminating the remaining cash credits on the North Slope after 2017. The Cook Inlet credits were eliminated last session in HB 247. The savings to the State for the Senate version is estimated by the Department of Revenue to be $1.2 billion over the next 10 years.
In comparison, the House version of HB 111 goes well beyond the Governor’s stated objective by also increasing existing taxes on the oil industry by $100-$300 million per year at low to moderate oil prices which is the likely price range for the near future. If passed by the Legislature as promoted by the House Majority, the bill will reverse the progress we have made in the last several years in increasing oil production and discovering new oil fields. New oil produces substantial new revenue under the existing tax structure and will help to keep the pipeline operational in the future. The House bill would harm Alaska’s economy because of an excessive tax burden at lower oil prices and a continued message to the industry that the fair share to the State is whatever the State feels it needs in any given year.
The justification for the House version of the bill is that the oil industry needs to contribute more to the elimination of the deficit, even when the industry is losing money or is marginally profitable. Notwithstanding low profitability, the industry is still being asked to continue to invest billions per year to maintain and to increase production. It ignores the fact that industry already pays for most of Alaska’s expenses and that the State receives the largest share of oil revenues (royalty and taxes) at every price range. Also ignored is the fact that the State of Alaska owes a substantial amount of money in contracted-for tax credits. Payment on this debt has continually been delayed, to the point where it is now a sizable liability to the State’s credit standing and unless action is taken on paying down this debt, it puts a black eye on our credibility as a trusted partner.
This week, Governor Walker proposed a compromise that can resolve the differences between the House and Senate. In that proposal, he suggested a version of HB 111 that was closest to the Senate bill with some adjustment to limit net operating losses to the oil fields from which they were generated.
We must ensure that any adjustment still maintains a reasonable incentive to explore and develop new oil. Let’s resolve the issue of cash credits, addressing both our past liability and a new program that promises stability in our tax structure while keeping the rest of the existing tax system intact. Failure to do so this session will likely prolong Alaska’s recession to the detriment of us all.
Gail Phillips is the former Speaker of the Alaska House of Representatives. Harry McDonald is Managing Director, Alaska, Saltchuk Resources and former owner of Carlile.