Voters take up oil tax debate before August referendum
The public was encouraged to participate in the oil tax discussion July 14 during a debate between current and former state government officials broadcast across Alaska.
Voters will have the final say on the issue August 19 when they either vote “yes” on Ballot Measure 1 to repeal the current oil tax structure known as Senate Bill 21, or “no” to keep SB 21 in place.
Rep. Les Gara, D-Anchorage, who has been at the forefront of the “Repeal the Giveaway” movement against Gov. Sean Parnell’s SB 21, and Juneau natural resources attorney Lisa Weissler sat on the “yes” side of the table at Juneau’s Mendenhall Valley Public Library.
Opposing them was Jim Clark, former chief of staff to Gov. Frank Murkowski and Murkowski’s former Revenue Commissioner and Alaska Electric Light and Power Co. chief Bill Corbus.
Alaskans from Craig, Dillingham, Bethel, Anchorage and Kenai were encouraged to question the four-person panel via videoconference.
Juneau Votes, a non-partisan group aimed at increasing voter turnout, coordinated the debate.
Gara opened his remarks by calling SB 21, which lowered the state’s take of oil profits at high prices, a “pathway to poverty” for Alaska. He said repealing SB 21 and going back to ACES, the progressive oil tax structure that increases the state production tax as market prices rise, is in line with the state constitution’s mandate to maximize the use of Alaska’s resources for the benefit of all Alaskans.
“(The constitution) requires us to get the maximum benefit possible because we own the oil,” Gara said. “It’s how we fund our schools, our construction jobs, our roads, our infrastructure, our energy progress.”
Corbus said nearly half of the state’s jobs are tied to the oil industry in some way and that SB 21 encourages short and long term investment that will secure those jobs as opposed to taking as much money as possible through high taxes.
Roughly 90 percent of the state’s revenue comes from the oil and gas industry in the form of lease sales and production and corporate income taxes.
Clark and Gara dominated the discussion.
Seated at opposite ends of the table, the two revisited a disagreement over SB 21’s actual production tax rate several times. Clark insisted it sets a 35 percent rate for existing production, a figure Parnell’s administration has used. Gara claimed the rate is 27 percent with tax credits for existing fields and 13 percent for “new oil” produced from fields that came online after 2003.
Over time the less-taxed new oil will overtake traditional production and cripple state revenue, Gara and Weissler said.
Gara pointed to Department of Revenue projections that the state will have a budget shortfall of approximately $2 billion over the next five years at oil prices of $100 per barrel as proof that SB 21 is a “giveaway.”
Clark called it “disingenuous” to attribute those losses to the new tax — that they would’ve occurred under either tax system because ACES and SB 21 generate about the same revenue for the state with oil prices at or just above $100 per barrel.
At lower prices, SB 21 draws more tax dollars, according to the Revenue Department.
Increasing production in the existing fields by 2 to 4 percent would help blend the lower taxes of new oil into the state’s take and offset potential revenue declines, according to Clark.
He said Gara’s cohorts in the “Repeal the Giveaway” campaign agree ACES was not the correct tax system because production decline continued at an average of about 6 percent per year during the six years it was in place.
He noted that the total government take — the combination of local, state and federal taxes on net oil revenue — under ACES averaged about 72 percent.
“That’s quite a bit higher than our competitors,” Clark said.
The oil producing states edging the Gulf of Mexico have total take rates near 50 percent, he said, and to be in the middle of the pack Alaska’s needs to be from 60 to 65 percent.
Gara dismissed Clark’s claim.
“The tax rate is not what attracts new investment,” Gara said. “I know it has an impact, but it’s not what attracts new investment.”
He backed that statement by highlighting the fact that North Slope oil production has declined steadily since 1989 under numerous tax regimes.
When dealing with large corporations that do business in a global market lower taxes or tax credits must be tied to in-state investment, Gara said, and the “flaw of SB 21” is that there are no such requirements in the law.
Even Parnell’s own Revenue Department forecasted a 45 percent decline in production by 2024 under SB 21, Gara contended.
Corbus said those figures are based on prior investment projections by producers and do not account for future projects encouraged by the newer tax.
Clark said the recently announced stem in production decline — production in fiscal year 2014 was just 700 barrels per day less than fiscal 2013, the Revenue Department announced — proves SB 21 is working.
Gara offered his view on how the state should deal with oil taxes if SB 21 is repealed and ACES is reinstated.
“We should rewrite a law that takes some of what was in ACES, a lot of what was in ACES, that says you get tax breaks if you invest in Alaska — you can buy your tax rate down if you invest in Alaska,” he said.
Clark countered that a 2010 reduction in taxes for Cook Inlet producers helped spark what is now considered a rebirth of activity in the Inlet that has quelled fears of a natural gas shortage for Southcentral.
Oil industry investment is spurred by a combination of oil price, ease of production and taxes, Clark said. He emphasized often during the two-hour back-and-forth that Alaska must find the “sweet spot” between state tax, oil price and production to maximize state revenue.
Additionally, Clark predicted that if ACES is reinstated, legislators will be hesitant to change it, as Gara says would happen.
“I think a vote of the people that turns down SB 21 and goes back to ACES is going to live with ACES, which even the ‘yes’ proponents agree is a broken system,” Clark said.
Gara said he plans on reintroducing a bill in the upcoming session that would provide state-funded, low-interest loans to independent producers for processing facilities and other production infrastructure as a way of encouraging investment.
The one point both sides could agree on is that projecting oil prices, which play a dominant role in which tax structure garners the state the most money, is a losing game.
“I’ve rooted for different oil prices for different reasons and I’ve been wrong every time,” Gara said.
Corbus said oil prices are unpredictable because they are subject to an “emotional business” that has much to do with international politics.
Clark said because the state relies so heavily on oil taxes for its revenue Alaska has created a “de facto” partnership with the producers and is “at the mercy” of the oil and gas markets, like it or not.
“(Oil companies) are not in Alaska because they love us; they’re in Alaska to make money,” he said.