AJOC EDITORIAL: Opponents of tax reform still don't get it
On the opposite page you’ll find that Rep. Les Gara has his knickers in a twist over the spurt of positive news flowing from the North Slope in the aftermath of the latest legislative session that ended with passage of a comprehensive oil tax reform bill.
A few days after Senate Bill 21 passed on the final day of the session April 14, ConocoPhillips said a rig was en route to the Kuparuk River field on the North Slope; Brooks Range Petroleum declared a goal for a 2014 production start-up at its small Mustang field; and the Spanish major Repsol announced three successful test wells drilled this past winter near the Colville Delta, and that two of them look promising for development after the tax change.
All of the companies praised the passage of SB 21 as an important step in the economics of these developments going forward and, naturally, this hasn’t sat well with the opponents of tax reform who are no rookies at playing PR themselves.
It is more than mildly amusing to observe these folks get so self-righteous while they brand tax reform a “giveaway” and proclaim a negative first quarter earnings report from ConocoPhillips as proof ACES works.
Sen. Bill Wielechowski accusing Gov. Sean Parnell of spreading “propaganda”?
Please. An amoeba has more self-awareness.
Of course we are not naïve enough here to believe there is no political timing to these announcements or comments about SB 21 — of course there is — but we are certainly not gullible enough to believe that ConocoPhillips mobilized an additional rig for the Slope earlier this year in the belief that ACES would continue.
The most casual observer knew that oil taxes would be cut in some manner this session after the Alaska voters spoke in the 2012 elections and broke up the Bipartisan Majority blocking Parnell’s signature policy goal in the Senate. The only question would be by how much.
Let’s examine that for a moment.
Under SB 21, eliminating the punitive progressivity formula reduces revenue by $1.4 billion in fiscal year 2015, the first full year of the regime.
However, raising the base tax rate to 35 percent and limiting capital expenditure credits raises $1.725 billion to fully offset the elimination of progressivity and then some.
Where the fiscal hit happens — which assumes no new production from either legacy fields or new fields — is in the per barrel tax credit ranging from $0 at high prices to $8 at low prices.
This is the smartest way to issue credits. The companies get credit for what they produce, not for what they spend. Alaska receives no tax revenue from barrels that aren’t produced; but neither do the oil companies receive tax credits for not actually increasing production.
There’s a phenomenon that happens under highly progressive tax systems like ACES, with its investment tax credit system, called “gold-plating.” Essentially, companies have an incentive to maximize expenses because as prices fall, the state absorbs a greater and greater share of the costs and takes less and less for every $1 drop in prices because expenses remain a constant or increase.
So while opponents of tax reform routinely point to job and spending numbers on the Slope as proof ACES works, they do so while blithely ignoring the fact that production has not kept pace.
Those who claim Parnell is giving away tax dollars are, in fact, cheerleading for a program in which the state is footing the bill for companies to maintain the status quo of decline.
Under the per-barrel credit of SB 21, companies get tax credits for performance by increasing production. The upside for the companies is they get to keep more of their revenue, which has coincidentally been proven over time to be the surest economic incentive to grow.
In Gara’s defense of ACES, he bizarrely points to the ConocoPhillips move at Moose’s Tooth as having the goal of reducing the Kuparuk field decline from 6 percent per year to a 3 percent decline per year. Like Wielechowski’s backhanded congratulations to ConocoPhillips every quarter even when production and profits fall, the small-mindedness is astounding.
The goal isn’t simply to decline at a slower rate. The goal is to stop declining and move to growth. And unlike the days of rock bottom oil prices in the late 1990s and early 2000s, companies now have every reason to produce more.
One of the most absurd criticisms of SB 21, however, is that it doesn’t require companies to spend their Alaska profits in Alaska. This is the greatest evidence of all that the opponents of making Alaska a competitive oil jurisdiction just don’t get it.
What if other countries or states mandated that Shell or Repsol couldn’t spend their profits in Alaska? Despite Alaska sitting on top of the globe more connected to the international community in most ways than to the rest of the U.S., these critics still think they can craft such a regime that would restrict the capital decisions of multi-national corporations with options.
The correct path is to make Alaska hospitable enough that it’s better for the majors and the up-and-comers to not only make profits here, but to reinvest here.
Maintaining hostile postures and punitive taxes in the midst of a friendly regime oil boom in the Lower 48 is the worst choice our state could make.