Fights over oil taxes and the fiscal cliff
The incoming Alaska Legislature is going to face the same daunting fiscal issues as its predecessor, but the Walker administration is hoping the impending session will at least have a different theme.
“We don’t want the 2017 legislative session to be dominated by fights over oil taxes, we just don’t. I can’t stress that enough,” said Tax Director Ken Alper said during a Thursday morning address to the Resource Development Council for Alaska. “We actually have bigger issues in front of us right now, mainly Alaska’s fundamental imbalance: our giant structural budget shortfall.”
While much was said and written regarding the state’s $3 billion-plus budget deficit over the past year, ultimately, little was done.
The marathon 2016 legislative session bogged down into a political fight over oil and gas tax credits and how much, if at all, the state can afford to subsidize or incentivize growth in its trademark industry. That largely relegated the bigger issues Alper referenced to be heard during legislative overtime and subsequent special sessions called by Gov. Bill Walker. By then, legislators that convened in January were clearly weary as the calendar turned to summer, and with two-thirds of them up for reelection the prospects of passing bills that would not only overhaul state budgeting but touch the pocketbooks of every Alaskan in some way faded quickly.
That said, the tax credit issue will come up again, Alper acknowledged, as the administration still needs to “stop the bleeding” from the North Slope credit program, that was mostly untouched in last session’s legislation that focused on Cook Inlet.
The status quo could leave Alaska on the hook for $4 billion or more if the major recent discoveries by Caelus Energy and Armstrong Energy, which could cost upwards of $13 billion combined to develop, are seen through to fruition because of the North Slope net operating loss credit that allows small companies to claim up to 35 percent of exploration and development costs in refundable credits.
There are several options available to alleviate the prospective bill, but finding the fairest of them all without chasing business away is the challenge.
“If you’re going to do that — changing a major benefit that only accrues to the explorers, how do you make it a fair impact so that we’re not overly tilting the field again towards the major producers? That’s the conundrum that we’re wrestling with internally at this point,” he said.
The more immediate conundrum the administration hopes will garner more attention come Jan. 17 when the Legislature gavels in is the $3 billion one.
Gov. Bill Walker said time and again last session — as ratings agencies downgraded the state’s credit ratings and in-state companies threatened to pull investment — that a comprehensive solution to close the budget gap and reduce the state’s dependence on oil revenue was badly needed then.
Alper painted the picture that if Alaska was speeding towards the “fiscal cliff” over the past year; the front tires are now over the edge.
“If no (fiscal) solution is passed this coming session it means that the Legislature in 2018 can’t balance the budget, period,” he said. That would lead to a “panic, hair on fire budget a year from now,” Alper described.
That’s because at the end of the current 2017 fiscal year next June the State of Alaska will have about $4 billion left in the Constitutional Budget Reserve, or CBR, its lone remaining legitimate savings account. Therefore, if the gap is not closed and another $3 billion or so is drawn from the CBR, only about $1 billion will be left to fund the 2019 fiscal year budget, a situation that could lead to damaging budget cuts, dramatically high taxes, or both.
The new, bipartisan-led House Majority coalition formed with the stated goal to fix the problem this year after much of the governor’s fiscal legislation stalled last year.
The current unrestricted General Fund budget is about $4.4 billion. When adjusted for population and inflation, the 2017 budget is on par with 2006 levels and “it’s well below the average for all 40 years since (the Trans-Alaska Pipeline) started flowing,” Alper said.
The $4.4 billion budget is also down more than 45 percent from the peak spending years of 2012 and 2013. But to those who insist more budget cuts must be the primary the solution, Alper said that simply isn’t an option.
“We are part of the effort to further downsize state government. We know that our state has the highest per capita spending in the country,” he said. “But it’s also true Alaska really is different. Just like industry, we have high costs of living; we have big logistical costs; the state funds the majority of public education, which is not true all over the country where it’s largely supported by local property taxes and you get big disparities between wealthy school districts and poor.
“Alaska has made that go away by the state funding public education.”
With a negligible rural tax base to support education, successfully shifting that major expense away from the state would be a nearly impossible feat.
“There truly are limits to how far we can cut government, but the budget has been trending downward severely for four years now and it will continue,” he said.
And since, according to Alper, it would take $102 per barrel oil or each adult Alaskan suddenly smoking 10 pounds of legal, state-taxed marijuana per year to balance the current budget, two options remain: broad-based taxes and a structured draw from the earnings of the Permanent Fund.
The Permanent Fund bill that passed the Senate last year would have provided at least $1.6 billion to the state General Fund yearly, barring another financial market meltdown. That, on top of the roughly $700 million that could come from $1,000 per person in additional taxes and $60 per barrel oil — a more realistic possibility after other oil producing nations recently agreed to cut output — would leave the annual deficit in the low hundreds of millions, not billions.
While new taxes understandably go over like flatulence from the front pew, Alper noted even with an additional $1,000 per person in personal taxes, up from about $500 currently, “Alaska would rocket past New Hampshire” to become the 49th least taxed state in the union.
Last session the governor proposed an income tax to raise about $200 million and a suite of other industry tax increases. Alper said several weeks ago that the administration is working on its own income tax system, rather than piggybacking on the federal tax, as its previous bills did.
Tax credit trading
Alper also said the state’s liability of refundable tax credits, those which the state pays explorers or small producer companies directly, is starting to change as time passes after Walker’s vetoes of the credit payments in the last two state budgets.
Alper told the Journal in mid-November that the Revenue Department was projecting the credit liability under current law to be about $1.1 billion at the end of the 2018 fiscal year — in a year-and-a-half. He said Thursday that figure has been revised down to less than a billion dollars as companies holding the unfunded credit certificates look for ways to get paid something.
Some of those companies have started selling the credits to the large North Slope producers. State law prohibits companies producing more than 50,000 barrels of oil per day — a group that for years was limited to BP, ConocoPhillips and ExxonMobil, but now includes Hilcorp Energy — from receiving direct payments for tax credits. The large producers can, however, use the credits against their production tax liability. And that liability should keep growing if global oil prices continue to stay above the roughly $45 per barrel break-even threshold for production from the longstanding North Slope fields.
The credit trading doesn’t change the state’s situation much; it means less money out in exchange for less future oil tax revenue in. But the smaller companies selling the credits are still taking a hit on the deal.
While the details of the private transactions aren’t disclosed, administration officials with extensive knowledge of the issue have speculated the credit certificates are usually sold for just 20-30 percent of face value.
Alper offered additional insight into the mostly confidential industry tax credit program, saying the Revenue Department has identified 16 oil and gas projects now in production that have benefitted from the roughly $3.5 billion the State of Alaska has spent on the credits since 2008 — about two-thirds of which went to Slope work.
A snapshot of the eight North Slope projects now online with state help show that if production from those projects is divided into the amount the state spent on them, “the state is into these projects on average for about $24 per barrel,” Alper said.
For the eight projects in Cook Inlet, primarily a natural gas basin today, the state investments average out to about $2.10 cents per thousand cubic feet, or mcf, of gas, according to Alper.
He noted that the per volume dollar amount will continue to fall as long as production continues to flow from the fields aided with the money.
Elwood Brehmer can be reached at [email protected].