Legislative session opens with oil tax talks

Posted: Sunday, January 23, 2011

The state Legislature opened its 2011 session in Juneau Jan. 18 and state legislators got right down to business in briefings by state agencies and the budget.

Gov. Sean Parnell outlined an ambitious agenda to stimulate the state's economy and secure new energy supplies in his State of the State address the following day, Jan. 19.

Parnell, a Republican, outlined key themes of his proposals including a major change in state oil and gas production taxes intended to spur more industry investment. House leaders, including Speaker Mike Chenault, R-Nikiski, and Rep. Mike Hawker, R-Anchorage, are making similar proposals.

The idea drew immediate criticism from Democrats in the Legislature.

Critics said the price tag -- about $5 billion in revenues given up over the next few years -- is too high, and there is no real guarantee from the industry that if taxes are lowered, new investment and jobs will follow.

The governor also talked about his initiative to build a major hydroelectric project on the Susitna River between Anchorage and Fairbanks, which would bring new supplies of electricity into the power grid serving the state's largest communities.

Parnell also spoke of getting funds for his university tuition-assistance program, a key initiative of his in the 2010 session. Lawmakers approved the structure of the program but provided no funding. The governor hopes to change that this year.

Parnell's oil tax proposal is stirring the most discussion in the Legislature and is likely to dominate much of the 2011 session, which will conclude in mid-April after 90 days.

In a press conference, House Democrats weighed in on Parnell's tax plan. Rep. Les Gara, D-Anchorage, said industry employment levels and investment are still high even with the current tax, and that the change can't be justified. Rep. Beth Kerttula, D-Juneau, leader of the House Democrats, said world oil prices do more to stimulate investment than tax policy.

Parnell defended the plan, arguing the state must move quickly to stimulate new investment to stem the decline in production from North Slope fields. Production has declined 7 percent annually over the last year and a half.

Oil and gas producers spoke favorably of the tax.

"We are encouraged that Governor Parnell and members of House leadership recognize the need to improve the investment climate in Alaska," a ConocoPhillips spokesperson said in a prepared statement. "We are still reviewing the specifics of the governor's proposal and believe the mechanisms outlined are a step in the right direction, though we are concerned with the timing of the proposed improvements."

The concern with timing relates to the schedule Parnell proposes for implementation of the tax changes.

The governor's change would cap the Alaska oil tax at 50 percent of net profits: it can now exceed 80 percent in some cases- and also provide for the tax to be "bracketed" so that tax rates that rise as oil prices increase apply only to the increments of production between price points rather than applying to a producer's entire production stream, Parnell said.

The change would have the state oil tax structured in a way similar to the way personal income taxes work, he said.

The state's high production tax rates have heavily criticized by industry and cited as a cause for reduced drilling and other new field development activity since the tax changes were adopted by the state in 2007.

Two other parts of the proposal would establish a lower beginning tax rate of 15 percent on new fields brought into production after January 2011, a reduction from the base tax rate of 25 percent that now applies, and also liberalize state investment tax credits for in-field work, such as well "workovers," or maintenance work, on the North Slope.

Parnell proposed the increased tax credits for in-field work last year but the Legislature approved it only for Cook Inlet. This year the governor proposes to have it apply to the North Slope as well.

"Our current tax has performed well in bringing new revenues to our treasury but it's clear that with production declining from producing fields we need to do more than just grow out state savings," Parnell said.

"Oil is the backbone of our economy," and the stimulus provided in the tax reduction will add to jobs and business activity in the private economy, the governor said.

Alaska now has $12 billion in liquid assets in accumulated oil savings and with the current oil tax the forecasts are that the savings will be increase to $14 billion in three to four years, the governor said.

Rather than seeing the cash surpluses continue to accumulate, Parnell would rather see the private economy stimulated to create new jobs, he said.

The cash surpluses are in two state savings accounts, the Constitutional Budget Reserve and a separate statutory budget reserve. These are funds that are available for appropriation.

The state also has about $30 billion in a separate permanent fund, which cannot be spend on day-to-day government.

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