Oil, gas tax will boost revenues

Posted: Tuesday, November 27, 2007

Alaska legislators have approved increases in state oil and gas production taxes, a move expected to boost state revenues by an additional $1.63 billion this year.

Alaska's state Senate passed the bill 14-5, and the state House voted approval later, on Nov. 16, by 26 -13 on the last day of a special session called by Gov. Sarah Palin to consider an increase in taxes.

The revenue projection is based on an assumption that crude oil prices will average $71.65 per barrel, the price used in the state's official revenue forecast, according to Alaska Department of Revenue spokesman Jerry Burnett

The action comes days before the state is set to receive proposals to build an Alaska natural gas pipeline under a state law passed last spring during the Legislature's special session.

The tax increase applies to gas as well as oil, but state Revenue Commissioner Pat Galvin said previously the governor will consider lowering the tax on gas to get the pipeline project under way.

Alaska's production tax rate was increased from 22.5 percent to 25 percent of net revenues, but an escalator formula increases the tax rate as energy prices rise.

Meanwhile, the same bill also reduces taxes on gas sold within Alaska to 5 percent of net profits compared with a tax rate of 25 percent that applies to other gas production under the new law. The low tax rate already applies to gas produced for local markets in the Cook Inlet basin, in southern Alaska, but the Cook Inlet tax rate has now been extended to other parts of the state as long as the gas is sold to local purchasers.

The reduction is expected to boost exploration for gas in Interior Alaska basins.

Palin proposed an increase in taxes because she said she feels the state is not getting a fair split of oil production revenues at current high oil prices.

Her proposal would have increased state tax revenue by about $700 million this year, but legislators came up with their own proposals for increased taxes. Industry leaders in Alaska had a somber reaction.

"I am disappointed with the outcome. We all need to be focused on developing new oil production for future generations of Alaskans, but this legislation does nothing to encourage more investment," said Doug Suttles, president of BP Exploration (Alaska) Inc.

"This is a huge tax increase. It has got to have an impact on investments," ConocoPhillips Alaska Inc. vice president Kevin Mitchell told the Senate Finance Committee on Nov. 15.

The final vote concluded almost a month of wrangling over the tax after Palin called the Legislature into special session Oct. 18.

The final days of the special session were tense. Senate President Lyda Green R-Wasilla, held out for retaining the current 22.5 percent tax rate on net profits rather than the 25 percent favored by Palin, and ultimately the state House after that body passed its version of the tax.

Green was finally forced to relent after being convinced there weren't enough votes in the Senate to keep the lower tax rate.

Palin's tax bill raised the overall tax rate, but would have had a more modest revenue impact because it would have modified a "progressivity" formula in the current tax law.

Almost from the start, the Legislature adopted a more aggressive progressivity formula, however, so that the tax rate climbs increase faster as prices go up than under the existing formula or the bill proposed by Palin.

Legislators also made other changes to Palin's proposal. One was to not adopt a 10 percent gross revenues tax on the North Slope's two largest oil fields. Palin proposed the gross revenues tax as a "floor" tax a kind of safety net for the state treasury in case oil prices fell.

Palin said previously she supported changing the state production tax back to a total gross revenue tax, but was persuaded by economists in the Department of Revenue that the system would hurt high-cost projects, like heavy oil, because a gross revenues tax could not be adjusted to account for costs.

Many legislators also initially supported a gross revenues tax but were similarly persuaded, which led eventually to the abandonment of Palin's gross tax floor as the special session continued.

Palin conceded the loss of the floor tax, but only if the overall tax was increased so it brought in more money at high prices. This was coupled with a commitment to save some of the extra money in case oil prices did fall.

Legislators increased the overall tax, but as special session neared its end there was little talk about saving money.

Senate Finance Committee Co-Chair Bert Stedman, R-Sitka, estimated the elimination of the gross revenues floor lost the state about $200 million to $300 million per year in revenue, but that it was more than offset by increasing the tax effect of the progressivity formula, which will bring in more than a billion dollars a year.

Lawmakers were convinced that industry could afford to pay more taxes by economic models produced by Gaffney, Cline & Associates. The consulting firm, retained by the Department of Revenue, showed robust profits for the North Slope producers even at relatively modest oil prices compared with current prices.

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