Parnell unveils latest oil tax reform proposal as session opens

Photo/Chris Miller/AP

Gov. Sean Parnell has made a new proposal that would make substantial changes in the state’s oil and gas production tax. Parnell says the tax is now too high and discourages badly needed new investment on the North Slope, where production is declining.

A bill sponsored by the governor was introduced Jan. 16 in the state House and Senate, which convened the Legislature’s 2013 session in Juneau the day before.

The governor’s proposal leaves a 25 percent state tax on industry net production revenues in place but strips a controversial “progressivity” formula that hikes the tax rate as crude oil prices rise. At oil prices over $100 per barrel, at which Alaska North Slope crude oil is currently selling, the tax rate exceeds 40 percent of net revenues, state revenue officials say.

However, the progressivity formula causes the tax rate to increase as prices rise, to the point that the state captures as much as 70 percent to 80 percent of any gain from price rises, the producing companies have said in past interviews.

The progressivity formula would be lifted from all production, existing as well as new.

An added incentive in Parnell’s proposal is that for new oil, a 20 percent “Gross Revenue Exclusion” that would apply. In effect, it means the state’s 25 percent tax on net revenues would apply to only 80 percent of new oil produced, state revenue officials said in a briefing.

New oil would be produced in new fields outside existing producing fields, or new deposits developed within existing fields that are defined in Participating Areas within the fields, the officials said.

The participating areas are approved by the state Department of Natural Resources now as a matter of practice, using geologic criteria, but under Parnell’s proposal would also define a producing area where the added tax relief would apply. 

Parnell would also strip a 20 percent industry capital investment tax credit from the tax law, which applies to all investment including field maintenance. The state’s exploration incentives, which can pay up to 40 percent or more of exploration costs, are left in place, however.

The new proposal balances the overall tax law and aligns the state’s interest in revenue and encouraging new industry investment with the industry’s interest in improving overall returns on Alaska investment, state revenue commissioner Brian Butcher said in a briefing.

The investment tax credit offers a short-term benefit to the companies but that is overshadowed by the harmful effects of the high tax rates that occur with the progressivity formula, the companies have said.

For the state, however, the accumulating effect of the investment tax credit is becoming a financial problem — the cost of the credits is estimated at $1 billion next year — and removing it will give relief to the state’s income stream.

From the state’s standpoint, removing the progressivity formula will dampen revenues in the longer term but will likely encourage more investment, ultimately resulting in more oil production and state oil revenue.

“We’re not well aligned with our current tax system,” Deputy Revenue Commissioner Bruce Tangeman said.

The credits are a hard obligation, while price changes under the progressivity formula could negatively affect state revenues, leaving the state in a vulnerable position, he said.

Tim Bradner can be reached at [email protected]

01/16/2013 - 11:48am