Wagoner pushes new tax scheme

Posted: Sunday, July 30, 2006

Sen. Tom Wagoner, R-Kenai, floated a draft bill Thursday that would tax oil and gas production, not company profits as proposed by Gov. Frank Murkowski.

It would impose a production tax much the same way that is done today, but drop the problematic Economic Limitation Factor for all production except for Cook Inlet Basin oil and gas. The measure also would establish a lower trigger rate for progressive tax increases when oil prices are high.

The measure would not be introduced as a new bill, Wagoner said Friday morning, but could become a committee substitute for or used to amend oil and gas tax bills currently in debate in the Legislature’s third special session.

Wagoner said maintaining the current arrangement of taxing gross production, rather than profits, would remove ambiguities that might be expected of a new profits-based tax system and eliminate the costs and problems necessary for imposing a profit tax, such as audits or accounting reviews.

“Maintaining the gross system eliminates the possible legal actions for disputes and subsequent costs involved in those disputes,” Wagoner said.

He pointed to the Constitutional Budget Reserve, which was established from the settlements gained during years of litigation on tax and royalty disputes.

Wagoner’s proposal would end use of the ELF except in the Cook Inlet Basin, where taxes on production would remain the same as today — 12.5 percent for the first five years, and then going to 15 percent.

Everywhere else, the severance tax rate would be 15 percent.

Wagoner’s measure would boost existing exploration credits to provide incentives for exploration and preserve current accounting practices, he said.

For instance, he proposes pushing credits for certain exploration expenses from 20 percent to 50 percent, with adjustments contingent on when work was performed, how far it was from existing developments, and setting certain other criteria specific to Cook Inlet alone.

He also proposes a 25-percent credit on actual expenditures directly related to drilling a development well, but excludes expenditures related to corporate overhead or for facilities other than the development well itself.

“That will help defray the costs associated with the production of heavy oil,” Wagoner said, adding that developing heavy oil would necessitate drilling many more wells than a typical lease unit today.

Other parts of Wagoner’s draft bill include provisions that would:

n Provide for a tax deduction of 7,500 barrels per day for each day oil or gas was produced from a unit;

n Establish a “floor” of 80 cents per barrel for all taxable oil, including Cook Inlet’s.

n Add a new progressive tax similar to that built by the legislative conference committee during the first special session, except that the trigger rate would be set at $40 instead of $50 and a multiplication factor of .003 would be applied instead of .002. That would mean that tax increases imposed during times of high-priced oil would kick in sooner and grow faster.

Wagoner has been an outspoken critic of Gov. Murkowski’s proposed tax on oil and gas profits, a scheme considered essential to furthering a contract Murkowski negotiated with the three major oil producers, BP, ConocoPhillips and ExxonMobile. The contract could lead to construction of a gas line from the North Slope to markets in the Lower 48.

Other lawmakers have questioned the economics of such a project and the legalities of certain adjustments to Alaska law necessary to make it happen.

Wagoner’s measure isn’t the only one that would alter the governor’s proposed profits tax.

Anchorage Republican Reps. Mike Hawker and Ralph Samuels are working on a plan they hope to introduce next week that would keep the tax on profits, but determine the tax rates based on how much companies spent in Alaska. Companies that spent little in the state would pay the highest taxes. Those that did would get tax breaks.

Meanwhile, in what he called an unscientific poll of his South Anchorage district constituents, Republican Rep. Bob Lynn found that a majority expressed serious reservations about the governor’s proposed 20-percent tax on profits with a 20-percent tax credit.

Of those responding to Lynn’s survey, 70 percent favored the House’s proposed 22.5 percent profits tax or higher, and 75 percent wanted progressivity applied to any oil tax. Lynn’s constituents overwhelmingly supported a tax floor and opposed locking in tax rates long term, as proposed in the governor’s contract with the oil producers.

42.9 percent wanted decisions on oil taxes and a gas pipeline delayed until after the November general election, which could install a new governor and administration.

Sen. Hollis French, D-Anchorage, and Rep. Max Gruenberg, D-Anchorage, say they’ve found further “constitutional irregularities” with the contract, including its calls to indemnify producers against losses from normal business risks.

According to the lawmakers, the contract would shield producers against losses from the cost of a gas reserves tax (that voters will decide on in November), costs incurred in the normal regulation process, penalties for not meeting capacity obligations, and additional costs imposed by municipalities on operations in their jurisdictions.

The Alaska Constitution states that no money “shall be withdrawn from the treasury except in accordance with appropriations made by law.” The contract’s provision may operate without any legislative action, the lawmakers warned.

“The system set up by the contract amounts to back-door payments of the producers’ bills,” French said in a press release Wednesday.

Gruenberg said the payments would “simply get set off against the oil taxes owed the state.”

A 2005 Attorney General’s Office opinion said any such promises-to-pay would have to be done by specific appropriation, setting aside the money to pay the promise.

Those issues and others may trump the governor’s efforts to get a tax scheme in place and a contract signed before the general election.

Thursday, an Associated Press story out of Juneau noted that only one of 15 legislators agreeing to be interviewed said he would vote for the governor’s gas contract were it presented today. That was Senate President Ben Stevens, R-Anchorage.

Some said they wouldn’t vote for it under any condition, while other suggested they might if certain changes were made, especially to the planned decades-long freeze of oil taxes, the AP reported.

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