Peninsula state lawmakers say there is little chance the new special session Gov. Frank Murkowski has called for will bring results to the governor’s liking.
In a letter to state legislators on Thursday, Murkowski said the second special session, scheduled to start July 12, would continue efforts to reform the current tax structure the outdated Economic Limitation Factor, or ELF by replacing it with a Petroleum Profits Tax, or PPT, and to amend the Stranded Gas Development Act.
Murkowski said he would reintroduce his proposal for a profits tax rate of 20 percent coupled with a 20 percent tax break on future development investment, the so-called 20/20 option he negotiated with the three major producers.
Producers want the promise of a stable tax rate lasting 30 years for oil and 45 for gas, which they consider essential for a proposed gas line project to take Alaska’s wealth of North Slope natural gas to market in the Lower 48.
In its regular 120 day session and again during the first special session, however, state lawmakers could not agree on where the tax rate should be set, nor on how tax rates should change when oil prices are high, the “progressivity” issue.
What was clear was that members of both houses considered the negotiated 20 percent tax rate too low.
The most recent House and Senate versions of a the bill had higher rates 23.5 percent for the House, 22.5 percent for the Senate. An attempt at a compromise at 22.8 percent failed.
The governor’s call for a new session was not well received by lawmakers from the peninsula.
“I’m amazed he would start at 20/20 again,” said Rep. Kurt Olson, R-Soldotna.
Olson also said he thought the governor should have limited the scope of the new session to the PPT and left controversial amendments to the Stranded Gas Development Act off the agenda.
“The PPT could stand alone,” he said. “It could be there (put in place) regardless of whether a (pipeline) contract goes through. It’s needed because the ELF is failing.”
He said it was going to appear that the call for another special session was a political move meant to bolster Murkowski’s prospects for re-election. In his letter, the governor said it was nonsense that election-year politics would influence “such critical decisions.”
Olson would not say whether it appeared political to him, but noted the approval of a new PPT would give Murkowski something to point at as an accomplishment.
“And it would get us a tax program generating the proper tax revenue coming in,” he said.
Olson did not appear to hold out much hope for a new session’s success, however.
“Ultimately, we are charged with doing the right thing,” he said, adding that it remained to be seen whether a decision was the right one or a political one. “I think the mood will be worse than what it was during the last special session.”
Sen. Tom Wagoner, R-Kenai, wasn’t sanguine about the prospects, either.
“We spent 30 days down there and didn’t accomplish anything,” he said. “I hope we don’t go down there and don’t accomplish anything again.”
What the governor had in mind or whether the call for a special session was simply a ploy to make it look like something was getting done, Wagoner couldn’t say, but he did note another possibility that the governor may have successfully convinced enough lawmakers to change their previous votes.
Wagoner said he hadn’t heard anything on that score, but that the House and Senate had been very firm in their convictions with regard to higher tax rates.
“I don’t know what to say right now,” Wagoner said. “If he reintroduces the 20/20, that’s not going to hold.”
Murkowski warned in his letter that failure to replace the ELF with a PPT costs Alaska $3.2 million per day in lost tax revenue.
Wagoner said that wasn’t really true because lawmakers have agreed that any new tax rate would be retroactive to April 1, 2006. Thus, it wouldn’t matter if the governor presented a PPT bill at the July special session or after the election in November, he said.
“I would say there is no chance” that the Legislature would adopt Murkowski’s 20/20 proposal, said Rep. Paul Seaton, R-Homer.
Another sticking point in the governor’s position, Seaton said, was that the negotiated deal contained no progressivity, no provision for upping the tax rate when oil and gas profits were through the roof. Legislative versions of the PPT bill contained such provisions, and it is unlikely state lawmakers would be willing to abandon progressivity.
Rep. Mike Chenault, R-Nikiski, said lawmakers needed to address the PPT. He said he could live with a 20/20 package as long as there was sufficient progressivity in it to account for high oil and gas profits. That, he believed, is fair to the industry and would ensure fair return to the state. On the other hand, he expressed doubts for the 20/20’s survival.
“No, not in the final version,” he said.
He also said there was more work to do on amendments to the Stranded Gas Development Act.
In his letter, Murkowski also took aim at competing gas line projects, saying they would “impose greater risk to the state” and were “painful paths to years of litigation and further delay.” He said they were not economically sound.
He also said delaying action on a new tax scheme and pipeline project until after November risked impact from a ballot issue going to the voters a proposal to impose a tax on lease holders for any delay in developing gas reserves, the “reserves tax.” Murkowski warned that the reserves tax had the potential for killing the pipeline project’s economics.
“Signing a contract ahead of that election will provide Alaskans the assurance that punitive taxes are not necessary in order to get the gas pipeline,” the governor said.
The reserves tax would impose a yearly tax of 3 cents on each 1,000 cubic feet of gas not moving to market from qualifying fields. It would disappear when gas was moving at a rate of 2 billion cubic feet per day. The idea was to encourage producers to work toward a pipeline delivery system as quickly as possible.
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