AJOC EDITORIAL: Gara strikes out over tax rates

After years of debate and endless hearings on the subject, it’s remarkable at this late date that Dan Seckers still had to teach a chapter out of “Tax Policy for Dummies” at the March 22 meeting of the House Finance Committee.

The tax counsel for ExxonMobil actually had to explain the difference between a statutory tax rate and an effective tax rate to Finance Vice Chair Les Gara, D-Anchorage, in a lengthy exchange that descended into the surreal from the sheer remedial nature of it.

After giving testimony more blunt than a two-by-four about the investment-killing implications of House Bill 111 that would raise oil taxes and slash deductions on losses, Gara took a pathetic swing at Seckers over the state’s base tax rate of 35 percent on net profits.

“You do recognize that’s a price-sensitive tax rate,” Gara said, “that that is the tax rate at like $159 per barrel that the world has never seen … You never pay 35 percent of your profits at prices below $150 per barrel, right?”

Strike one.

“People need to understand the difference between a statutory tax rate and an effective tax rate,” Seckers said, probably wondering why he needed to spell this out to one of the longest-tenured members of the Legislature. “Corporations don’t pay 35 percent (federal) tax, nor do companies here pay 35 percent production tax because it’s on net. It has to be below that because it’s on net. If you want the statutory rate to equal the effective rate then you need a gross tax. That’s the only way that’s gonna work.

“By its design a net tax can’t yield what you’re trying to imply. The effective tax rate will be lower, but we pay the tax. The calculation is based on 35 percent. If I have a $100 profit, my tax is $35 on that. It may get reduced by credits, absolutely, my effective tax rate may come down. But it’s calculated at 35 percent. That’s the function you have.”

Gara stepped to the plate again.

“I can’t let you get away with that,” Gara said. “The federal rate is 35 percent; obviously you get a deduction on a 35 percent tax rate. This is much different. The lower the price, the lower the actual tax rate … There is no 35 percent tax rate. It’s price sensitive.

“When you compare to federal rate at 35 percent, that really is a 35 percent rate at all prices and you deduct from that. You have to recognize there’s a big difference between those kinds of tax systems.”

Strike two.

“No, I’m sorry, I think you’re misspoken on this,” Seckers replied. “The statutory rate is 35 percent. Don’t believe me? Ask your tax director. If I have $1,000 of profit, my tax is $350 and credits come after that yielding an effective rate.”

At this point committee Co-Chair Neal Foster, D-Nome, tried to mediate the argument by saying “we’re going to have to agree to disagree,” but Gara insisted on trying to get the last word.

“The credit he’s talking about is price related,” Gara said of the sliding per barrel credits that reduce the statutory rate. “They have nothing to do with investment.”

Whiff. Strike three.

“We don’t get that credit because prices are whatever,” Seckers said. “I have to produce a barrel of oil. That’s an activity I have to take. If I don’t produce a barrel of oil, I don’t care what the price is, I get zero. So to sit there and say, ‘oh, I just get it because of price’; that’s not true.

“The only way I get it is I have to produce the oil. There are activities and steps I have to take, costs I must incur, to get that credit, to get that reduction if you will. I have to produce. That’s the whole purpose of putting that in there. The more I produce, the better off I am, which is good for the state. More production tax, more royalty, more income tax, more property tax. I have to produce to get that credit.”

And with that, Seckers sent Gara to the showers.

The impotent polemic by Gara against Seckers reveals a willful ignorance or disingenuousness on his part, as well as a fundamental lack of gravity by the Democrats who have elevated him to a leadership position on tax issues.

In short, nobody pays the statutory tax rate on net income. Not ExxonMobil, not Donald Trump, and not Les Gara, either.

Seckers didn’t blow this fastball by Gara, but his comment about the federal tax rate not being price sensitive deserves shredding as well.

The rate may not be sensitive to the price of oil, but it is sensitive to whether a company made money or not. That is definitely not the case in Alaska.

Rep. Tammie Wilson, R-North Pole, asked BP’s Damian Bilbao what the federal take was on oil last year. Bilbao testified moments earlier that BP lost about a million dollars per day last year in Alaska.

“I would imagine for this year, you’re going to get a wide difference between members of industry. If the industry is suffering a loss, I can’t imagine there was a big federal income tax payment due,” he said.

Compare that to Alaska, where the oil industry payments to state and local governments topped $2 billion in 2016 amid massive losses across the board with prices starting the year about $20 below the breakeven number for North Slope crude.

It’s no wonder Alaska can’t come up with a coherent tax policy when leading members of the Legislature like Gara can’t or won’t attempt to get the basics right.

Andrew Jensen can be reached at andrew.jensen@alaskajournal.com.

Updated: 
03/29/2017 - 1:16pm

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