Behind the criticism of SB 21 and the effort to repeal it

Photo/Mckibben Jackinsky/Homer News

Why did people get so worked up about Senate Bill 21, the bill changing Alaska’s oil and gas production tax?

The bill passed the Legislature in April 2013 and within weeks there were petitions filed for a voter referendum to repeal the tax, and shortly afterward people with clipboards were at the entrance to retail stores gathering signatures.

The referendum gained sufficient signatures, and Lt. Gov. Mead Treadwell approved its placement on the primary election ballot for this coming Aug. 19.

SB 21 generated a lot of political heat as it moved through the Legislature during the 2013 session in Juneau.

Gov. Sean Parnell sponsored the bill and supported it along with most Republican lawmakers. Democrats uniformly opposed it, but they were in the minority. A handful of Republicans also voted against it in the House and Senate.

At the time SB 21 passed, it did appear that it would reduce state revenues compared with what the existing tax, known as ACES, would have brought in.

The Department of Revenue estimated in April 2013 that the tax change would result in a revenue loss of $670 million to $720 million in fiscal year 2015, the current budget year that began July 1, compared with what ACES would have brought in.

However, in the department’s fiscal year 2015 revenue forecast released in December 2013, the tax change was estimated to have a much smaller revenue impact.

In fact, were ACES in effect in fiscal year 2015, the current budget year, it would have brought in less revenue, the department said.

Yet in the heated debate raging since 2013, critics said the projected revenue loss would be $2 billion, hence the slogan, “a $2 billion giveaway.”

Generally, the Revenue Department now estimates the new tax will bring in about the same amount as ACES at current prices, but that can change year-to-year depending on oil prices and costs. If oil values drop, SB 21 would bring in more money. If values rise, ACES would bring in more money.

The change in the Revenue Department’s estimates, between April 2013 and December 2013, set off new changes from opponents of SB 21 that the numbers had been “cooked” by the Revenue Department and industry. 

That it coincided with an actual revenue decline of $1.8 billion in fiscal year 2014 and $1.3 billion in fiscal year 2015 added fuel to the controversy, although Revenue Commissioner Angela Rodell explained to legislators in January that the tax change had nothing to do with the drop in revenues (the new tax didn’t take effect until Jan. 1, 2014).

What caused the decline was a combination of lower oil prices, higher per-barrel production costs and an 8 percent drop in production for fiscal year 2013 that was unexpected in April 2013.

Politics of oil

At the root of the animosity, though, is a distrust many Alaskans have of the oil and gas industry and an almost knee-jerk disbelief of any claims by industry.

The issue has also become political, too, with most Democrats automatically lining up as critics of oil tax changes and Republicans mostly lining up behind Gov. Sean Parnell’s push for the change.

There are exceptions, of course. Former Gov. Tony Knowles, a Democrat, favors SB 21. Sen. Bert Stedman of Sitka, a Republican, voted against SB 21 and favors its repeal.

The oil tax reform issue has been around for a few years.

It was first before the Legislature in 2011 and 2012 as House Bill 110. That bill passed the Republican-controlled House but bogged down in the state Senate, which was then controlled by a coalition of Democrats who had gathered enough Republicans to form a majority.

Even still, a coalition in the Senate was making progress toward changing the ACES tax when the Legislature ran out of time in the 2012 session. A bill passed the Senate that put in place tax reductions for newly-discovered oil in fields or deposits within existing field areas that were not producing.

It did not contain a reduction for the already-producing fields, however, which is where the big hang-up was. The House rejected the Senate-passed bill, arguing that the existing fields have a great deal of undeveloped oil and that a tax reduction applied there would unlock those deposits as well.

Legislators were in wide agreement that “new oil” deserved a tax break. The argument was over “old oil,” or oil produced in the large “legacy” fields.

In 2012 this disagreement might have been worked out if legislators had had more time. As it was lawmakers bumped up against the 90-day adjournment deadline, so the bill died.

It was resurrected the following year, in 2013, as SB 21.

The politics of the debate increased after the Senate leadership changed hands in the 2012 election. Two Fairbanks Democratic senators were defeated in highly-charged races and it was enough for the Senate to be controlled by Republicans in 2013 and 2014.

The lingering resentment over the loss of control of the Senate would help fuel the animosity toward the tax change, which passed in the closing days of the 2013 session, and later, the effort to repeal it.

Other objections

If there was no revenue reduction, or “giveaway” in SB 21 — at least in the 2014 and 2015 fiscal years — what other objections are there?

There are two, mainly. One is that there will be a tax reduction if oil prices climb. A current criticism of SB 21 is that the state could lose out on substantial revenues during a period of high prices.

To be sure, though, the state will gain revenues with SB 21 at higher prices because it is a net revenues-type tax, so if oil values go up the state’s income will increase.

However, revenues would have gone up more were ACES still in effect because of the progressivity formula.

The key criticism of ACES was that the gain under the tax was one-sided, almost all to the state and little to industry. That made Alaska projects look bad compared with other states.

Another criticism of SB 21 is that it grants a tax reduction to “old oil,” or existing production in the North Slope fields. While there were few objections to lowering taxes for new oil, giving “old oil” the tax break seemed like a giveaway to critics.

Also, while the argument for the old oil break was that this would encourage companies to invest to squeeze more oil from existing wells, there was no guarantee or requirement that this would happen.

In contract, the “new oil” tax break, in the form of a per-barrel tax credit, must be linked to development of a new deposit. The tax reduction doesn’t occur unless money is invested to produce new oil.

To this, the governor and companies said critics should watch the producing companies to see what they do. Despite the lack of an explicit guarantee or specific requirements in the law there have been significant investments since SB 21 was approved.

07/10/2014 - 10:17am