Lawmakers split on oil tax

Olson, Seaton vote for 23.5 percent rate, Chenault votes against it

Posted: Tuesday, June 06, 2006

Sunday’s vote passing the Alaska House’s version of the controversial petroleum profits tax regime had members crossing party lines, and that included the three Republicans representing districts on the Kenai Peninsula.

The House upping the 22.5 percent tax rate adopted by the Senate last week to 23.5 percent. Oil companies would get a 20 percent tax credit on investment under both versions.

The House wrote in an escalator tax that would go into effect above $35 a barrel after expenses and increase 0.25 percent for each $1 increase over that. The Senate’s version proposed a 0.1 percent escalator tax increase. Gov. Murkowski’s original bill had no such clause.

The measure passed the House 28-12. The vote had eight Democrats joining 20 Republicans in the majority, while those opposed included six from each party.

“It is testimony to the complexity of this issue,” said Rep. Mike Chenault, R-Nikiski, who voted against the House version, standing him apart from his Republican colleagues from the peninsula. Rep. Kurt Olson, R-Soldotna, and Rep. Paul Seaton, R-Homer, voted for the amended House version.

The various iterations of a profits tax that have undergone the legislative process in the regular and special sessions would produce more revenue for Alaska than the current Economic Limitation Factor, or ELF, they were designed to replace, Chenault said Monday. Setting the tax rate too high, however, risks slowing oil company investment in Alaska, something that ultimately would cost Alaskan jobs, he added.

But Chenault said his concerns are even more basic. There is an absence of reliable information and no consensus about just how various tax and credit rates would impact oil and gas industry investment or the future of a natural gas pipeline from the North Slope, he said.

“Nobody really knows what the right numbers are — not the economists, not the administration, not any legislator,” he said. “It’s all a crapshoot at this point.”

“That’s been the only consistent thing,” agreed Olson, saying even the experts don’t agree on where tax and credit percentages should be set to create the best possible regime for the industry and the state.

Olson noted, however, that Murkowski’s own expert consultant, Dr. Pedro Van Meurs, had suggested a tax rate as high as 25 percent and a credit rate of 20 percent. The governor had proposed the 20 and 20 he’d negotiated with BP, ConocoPhillips and ExxonMobile. Sunday’s House action fell “well within that range,” Olson said.

“The other consistent thought (among lawmakers and many of their constituents) is that we’re moving too fast,” he said.

No one, he said, was entirely comfortable with what emerged from Sunday’s vote, but he said that he could live with it, in part, because of something the House Resources Committee did Saturday on proposed amendments to the Stranded Gas Development Act. The committee voted to abandon the idea of freezing oil and gas tax rates for 30 and 45 years, respectively — a controversial and possibly constitutionally questionable proposition that Murkowski said would provide the tax stability petroleum companies likely to build a natural gas pipeline from the North Slope needed.

Instead, the committee proposed locking in tax rates for 12 years, but only after the oil companies had committed to actually building the pipeline.

“That would allow us to change the tax structure up until the actual start,” he said.

Twelve years was considered long enough for the companies to recoup their investments, Olson said.

“That’s a good provision,” said Rep. Seaton. “We are not going to tie up our oil taxes” until the project is sanctioned. “They we’ll set it at whatever is in place at the time.”

As for the oil profits tax bill, Olson said something would come out of a House-Senate conference committee that both bodies would be able to live with. Chenault reserved judgment until he sees what that committee produces. Seaton said he didn’t think the bill would require a conference committee at all.

“The bill is pretty well cleaned up,” he said. “It is close to the Senate (version). We have a good tax rate and good progressivity.”

The House version has another provision, a floor on the use of tax credits, that Seaton said has led to some misunderstanding that it is a floor on the tax itself.

“It’s not a tax floor,” he said. “What it says is that if you are a big producer (more than 75,000 barrels per day) and the price of oil falls far enough, you can’t use your tax credits to take your tax to zero. It’s a floor on when you can apply tax credits.”

Thus, even if prices fell into the low $20 range, big companies would continue to pay some tax. They could recoup that by applying credits appropriately when prices were high. Small producers would be allowed to use their credits at any time, Seaton explained.

The Cook Inlet industry is protected under the House and Senate versions. Chenault said the bill would not impose the new tax regime on inlet operations and would basically freeze inlet gas taxes at the current rate. The majority of inlet fields are so marginal they pay no severance tax under current system anyway. Chenault said the exemption increases the incentive to continue exploring in the Cook Inlet region and avoids the likelihood that the industry, if higher taxes were imposed, would simply pass increases on to consumers.

“They also get the credits,” Chenault said. “We hope that spurs more development.”

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