Last week, Gov. Sean Parnell rolled out his latest proposal to revamp the state’s oil tax structure. It’s the third time he’s tried to do this, and the last two attempts resulted in a stalemate.
Another session, another oil tax debate, and the rhetoric? Well, it’s mostly the same.
“While Alaskans haven’t always seen eye to eye on these issues, we can all see the obvious: Unless we restore balance to our tax system, our oil fields will become obsolete. We must make reforms – and we must make them now,” Parnell says.
And here’s House Minority Leader Beth Kerttula, a Democrat from Juneau.
“The Governor’s new bill would mean that when the oil industry rakes in record profits, Alaskans will lose troopers and teachers and not be building roads and ferries. This new bill is still a giveaway,” Kerttula says.
About 90 percent of the state’s revenue comes from oil production. Right now, it’s taxed in a variety of ways. Companies like Exxon and ConocoPhillips pay royalties on the oil they drill and they pay a base production tax on their profits. They also pay out a progressivity tax that operates sort of like a sliding scale, where they get taxed at a higher rate as the price of oil goes up.
Last year, the governor’s bill focused on bracketing that progressivity tax. Michael Pawlowski works with the Alaska Department of Revenue and specializes on oil taxes.
“And so what bracketing did was try to apply progressivity much like your personal income tax,” Pawlowski says.
Just like top income earners don’t pay the top rate on *all* of their money, oil companies would get to pay lower percentages on the first $30 they get per barrel and then their taxes could go up incrementally.
This time around, Parnell is proposing getting rid of progressivity altogether, so that all oil would be taxed at the same rate no matter what the price is.
“So, it flattens the tax system to a 25 percent base tax rate,” Parnell says.
Pawlowski explains that the bill has a few other provisions. He worked on the team that helped create it, and he crunched the numbers for the Revenue Department’s analysis of what it would do.
He says the governor’s bill would get rid of a 20 percent capital expenditure credit that the state gives to companies who are spending money to extract oil.
So, they would lose a tax break while they’re trying to produce oil but get their taxes cut once they start putting barrels through the pipeline.
Additionally, the governor’s bill would change the way a 25 percent operating loss credit is paid out. Right now, if a company that’s pretty new to Alaska puts a million dollars a year into exploration but they aren’t producing anything, it can get $450,000 from the state each year to help them cover their losses. Under the governor’s bill, they would only get a quarter million from the state and that would only be paid out once the company actually starts producing oil.
So what does all that would do to revenue?
“We get rid of the progressivity; which leads to a reduction in state revenues at this projected oil price. And I think that’s important to remember is that across the range of oil prices, this will look different,” Pawlowski says.
According to the fiscal note that Pawlowski helped draft, the governor’s bill would give oil companies a tax cut of about a billion dollars *a year* if oil prices and production turn out to be as forecasted. But of course, there’s a lot of uncertainty when it comes to the economics of oil.
“And just, just remember that looking five years into the future about what exactly a company is going to spend or what exactly oil production is going to be — these are forecasts around which the legislature, the governor, the public all base their decision. But they’re still a forecast,” Pawlowski says.
Over the next few weeks, legislators, staffers, and anyone watching the oil tax debate from afar is expecting a lot back-and-forth over what changing the oil tax structure could actually do to the state’s coffers.
That debate starts in earnest on Tuesday, when the governor’s oil tax bill will get its first committee hearing.