State must focus on oil tax: Changing oil, gas tax structure most important issue since oil found on Slope

Voices of the Peninsula

Posted: Monday, March 20, 2006

The most important issue to face our state since oil was discovered on the North Slope is now before the legislature in the form of the governor’s Production Profits Tax (PPT) bills, HB 488 and SB 305.

As currently written, both bills would repeal and replace Alaska’s tax on oil and gas production. Our current method of taxation, the Economic Limit Factor (ELF) has been obsolete for a number of years. The ELF formula used to calculate severance taxes on oil companies is a complicated one. With this formula, Alaska is getting an extremely low severance tax rate and it does not allow the state to reap any benefits from recent high oil prices.

A concern I’ve heard is that the bills are moving too fast. While it is true that both the Senate and House Resources committees have held meetings Monday through Saturday for the first weeks after introduction, there are literally hundreds of pages of information to digest. The committees are working hard to get complete and accurate information, as this rewrite must be completed prior to the end of session on May 9th.

The proposed House Resources Committee version of the PPT would bring Alaska into line with other oil producing countries around the world. Across the globe, oil rich nations demand a fair share for their oil. The producers are asserting that we should not increase the tax rate. However, they agreed to changes with the administration before the Governor introduced the bill. There are countries where the total government take is in excess of 75 percent and while I am by no means suggesting a rate of 75 percent, just remember they are apparently still making a profit paying much higher tax rates than Alaska is proposing. The committee is working hard to generate a tax structure that encourages future development of our oil and gas resources.

Calculations in a recent economics report show that at lower oil prices the government take would be virtually the same as the current tax system. With this new tax regime, in what ever it’s final form may be, Alaska will benefit from high oil prices. But like everything in life there is a potential down side.

As I said before, this is possibly the most important issue to come before the Legislature in decades. We are not rushing this bill through the Resources Committee. The public process on this bill must remain open and transparent, and while this process continues, I will keep careful watch so that the jobs and economics of production in the Cook Inlet are not diminished. We cannot afford to see production or exploration in the inlet decline further. The resources produced in Cook Inlet help to heat our homes and keep our lights burning. I can assure you this is my first consideration during all deliberations.

My concern for the Cook Inlet was the impetus for my amendment removing gas from the progressive portion of the bill, which was adopted by the Resources Committee. This will mean that when the price of oil goes up, taxes on gas will not change unless the price of gas also changes.

It’s being said this PPT is only the first step towards a gas line. While that may in fact be the case, this issue must be taken individually. The possibility of a gas line, while important, cannot be the only consideration. This revision to the oil tax must remain our primary focus.

The budget is irrevocably tied to the PPT. This new tax structure will mean even more money going into the states treasury making the long-range plan even more critical. Now is the time for this focus, not when state is experiencing a budget shortfall. We should always strive to be proactive instead of reactive.



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