AJOC EDITORIAL: What's the revenue on a barrel of nothing?
The problem with starting a political campaign with a deception is that eventually it unravels and has to be abandoned or it has to be defended to the point of inanity.
Such is the case with the ongoing effort to repeal the oil tax reform passed in April 2013 as Senate Bill 21. The proponents of repeal and reversion to the previous regime known as ACES kicked off their petition drive and campaign asserting that SB 21 was a “$2 billion giveaway” to industry — a figure that was roughly based on the projected budget deficit for fiscal year 2014 that will end this June 30.
Of course they knew that was a bogus claim. Alaska was projected for near-term budget deficits while ACES was in effect and, in fact, the state ended the 2013 fiscal year with a deficit of more than $300 million before SB 21 took effect this past Jan. 1.
It is worth noting that the same people who tout and were responsible for passing ACES are the same ones who were in charge of the Alaska Senate and passed the capital and operating budgets that led to the 2013 deficit.
These same people have also begun to shift their tune about the “$2 billion giveaway” since University of Alaska economist Scott Goldsmith released a report that showed ACES and SB 21 bring in roughly the same revenue for the current fiscal year and Alaska would be in a deficit under either system.
That’s because while SB 21 removed the aggressive progressivity formula under ACES that kicked in at high prices, it did raise the base tax rate from 25 percent to 35 percent. That means the state takes in more revenue at lower prices under SB 21 than it does under ACES.
In response, the ACES proponents have shifted their spin after witnessing the cratering of their claim that the current budget deficit is the fault of SB 21.
Now, they will grudgingly acknowledge that in fact there is no “$2 billion giveaway” this year under SB 21 but argue that when prices rise the state won’t make its windfall share of the gain that it would have under ACES.
They also point to Goldsmith’s report that the state would have made $8 billion less under SB 21 that it did under ACES.
That is indeed true. But it raises the larger question: At what cost?
In the last year before ACES, 2007, the annual production decline on the North Slope was 1.86 percent.
In the succeeding years under ACES, the annual decline was 5.3 percent, 5.7 percent, 7.2 percent, 5.7 percent and 5.5 percent.
The total annual production on the Slope declined by 28.5 percent from 280.5 million barrels in calendar year 2007 to 200.3 million barrels in 2013.
The annual decline for the 2013 calendar year was 2.4 percent, and the estimated annual decline for the 2014 fiscal year ending June 30 is 1.8 percent based on production that is exceeding the Revenue Department forecast by more than 13,000 barrels per day (resulting in about $374 million in additional state take).
No matter how you slice it, the production decline was smaller and drilling activity was better in the last year before ACES and in the first year after it was repealed.
So let’s return to the question of the cost to the state for beefing up its savings accounts and spending more than $3 billion per year on capital budgets under ACES.
While it’s true that the state would have made less under SB 21 than it did under ACES from 2008-13, what if production had not declined at an average rate of about 5.3 percent at that same time?
What if production had instead declined by 2 or 3 percent or less annually under a more favorable tax regime during a climate of high prices that should have encouraged additional investment?
Based on the cumulative 80-million barrel drop from 2007 to 2013, the state would have been able to tax an additional 40 million to 60 million barrels of oil if the total production decline had ranged from 7 percent to 14 percent instead of the 28.5 percent we saw under ACES.
Not only would that considerably change the calculus in comparing SB 21 and ACES, the state would be on a much firmer financial footing looking forward with greater production than it is now after enacting a growth-stunting tax formula that left Alaska behind while the rest of North America boomed.
Andrew Jensen can be reached at firstname.lastname@example.org.