Blaming oil tax reform for Alaska’s current budget deficit is just plain wrong.
Our budget deficit today is a result of low oil prices, low oil production and overspending, not oil tax reform.
A group of Native leaders, unions, businessmen and thousands of Alaskans who care deeply about Alaska’s long-term economic future led a three-year campaign to reform oil taxes to stop the decline of oil production.
We spent an additional year defending against a referendum to repeal the new law, called SB 21.
If we had not been successful, Alaska’s current deficit could be substantially worse. Here’s why:
SB 21 raised the base tax rate but eliminated progressivity so taxes are lower under high oil prices but the state collects more revenue when prices are low. With oil less than $50/barrel, that means Alaska is in much better shape with the new tax law because today’s more predictable and stable tax policy encourages the oil industry to increase investment. More investment equals more oil.
Secondly, the new tax law changed the way tax credits are issued. Now they are tied to production to provide incentives to put more oil in the pipeline, as opposed to the prior credits which were based on dollars spent.
Many of the exploration credits are going to smaller or new companies that are actively seeking new oil, but have not yet reached the development stage. They are also going to Cook Inlet as well as the North Slope. If Alaska cuts back on these credits, we may receive a little more present revenue, but would sacrifice future revenue from the new oil that will result. As prices improve, Alaska will benefit from more oil.
Even though we have a serious budget deficit problem this year, let’s consider the positives spurred by tax reform.
Employment and spending by the oil industry is at record highs, caused by major investment on the North Slope. This activity is slowing the production decline with renewed ability to reverse the decline and increase production. This gives Alaska opportunity for a sustainable, long-term economic future. It also keeps Alaskans employed.
Oil tax reform was a very long and difficult process, with thousands of hours of testimony, public education and a huge effort by thousands of Alaskans. If we had failed, Alaska would not only face a larger budget deficit today, but the economy would be worse as the drilling activity in Alaska would be much less vibrant, and there would be little chance of stemming the production decline that averaged over 7 percent per year over the past decade.
Alaska’s economy needs a stable, competitive tax and regulatory environment and a partnership with the resource companies to encourage investment to reverse the production decline. There is no way that Alaska can tax our way to prosperity.
Most of the talk recently has been about production tax rates. The win-win for Alaska is to increase new and old oil production, resulting in increased royalties, state corporate tax, property taxes and production taxes.
The Walker Administration, the Legislature and Alaskans statewide face serious budget challenges ahead. We need to continue to work together to make tough decisions that will determine whether Alaska is a place where our kids and grandkids can live, work and prosper.
At this critical time, it is imperative that we view the resource industry as our partners to keep the State moving forward.
Finding fair and balanced solutions to our budget deficit — while building on our renewed activity and competitive improvements — creates the foundation we need for Alaska’s future generations.
Jim Jansen is the Chairman of Lynden and a co-founder of the Make Alaska Competitive coalition.
