Poker fanatics should be enthralled by the high-stakes matchup unfolding in Juneau.
At the table are the state of Alaska and the oil and gas industry that harvests most of Alaska’s lucrative resources. Hanging in the balance is the future of that industry in Alaska, and by extension the state’s financial health.
Legislators are weeks into wrangling over the tax proposal Gov. Frank Murkowski and his administration negotiated with oil and gas industry representatives that would change the way the state takes its share of profits from oil and gas industry activity.
Not only will a new tax structure dictate the lion’s share of Alaska’s future revenue, but settling the tax issue is a precursor to a North Slope natural gas line deal, making the matter that much more important to settle and settle this session.
The current production tax system was developed when the state’s oil reserves were gushing forth with no end in sight. As it stands now, lowered production means lowered tax revenue for the state, meanwhile many North Slope fields get out of paying the production tax altogether.
It’s clear the system must be changed, but finding the most equitable way to do it has become an epic balancing act.
On one hand, the state wants to generate as much revenue as it can off its oil and gas reserves a desire made manifest through higher industry taxes.
But at the same time the state also wants to encourage companies to explore for new reserves, because without new finds there will be less activity to tax, not to mention the financial tailspin the Kenai Peninsula’s economy will be thrown into if a gas line isn’t developed soon with some means to pipe the commodity to Agrium and other local industrial users.
Enticing companies to invest in Alaska’s oil and gas industry takes financial incentives a lower tax rate, tax breaks and the like. Alaska isn’t the only place on the planet with oil and gas reserves, after all, and if we make it too costly for companies to do business here, they’ll go elsewhere.
So where’s the balance?
The governor’s proposal calls for a 20 percent tax rate on oil and gas companies’ net profits with a 20 percent credit on investments. Legislative consultants estimate that proposal would change the effective production tax rate to 12.4 percent, compared to an effective 5 percent rate under the current system. The change would generate an estimated $750 million more for the state per year.
As the proposal works its way through the Legislature, it’s being tweaked at every turn. Some legislators think the tax rate should be set at 25 percent. Others say there should be a graduated tax rate once the price of oil reaches a certain level so the state can reap a greater benefit from high oil prices. Still others want to scale back tax breaks and investment incentives.
Each proposal has one thing in common: Squeezing more profit from oil companies.
The Legislature should by all means work to get the state the most benefit possible off the resources harvested from our lands. But it’s a dangerous game to play. Oil companies grudgingly accepted the proposal negotiated with the governor’s administration. With each new revision proposed in the Legislature, company spokesmen say they won’t accept it; that anything other than the governor’s proposal is going too far.
Is it? Will companies really scale back operations, abandon a gas line or pull out of the state completely if the new tax structure isn’t to their liking?
Or are they bluffing?
That’s what legislators must decide, hopefully with input from all Alaskans from North Slope neighbors to Kenai Peninsula industrial park employees and even the residents of fishing and timber-dependent communities in Southeast. This showdown affects us all.
Complicating matters is the fact that it’s an election year, so partisan politics rears its head on all bills from mundane matters to this vital one. Legislators also are under the gun to pass a revised oil tax this session. That’s no easy feat. The issue is complicated, and the negotiations between the governor’s administration and oil companies were closed to public scrutiny, so legislators only recently got their first look at the proposal.
One thing’s for sure: This issue is too important for legislators to play this hand loosely. If they’re going to place their bets on a 25 percent tax rate and scaled-back investment incentives, they had better have sound research and reasons to back them more than just so they can tell their constituents they stuck it to the oil companies come election time.
Alaska has too much at stake to lose this hand.
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