Making Changes to Oil Taxes

By Dave Donaldson

One of the major goals of the Parnell Administration is to end the year with a plan that will increase oil production on the North Slope.  The governor told several audiences during the election campaign season – and since – that the best way to deal with the state’s financial future is to give oil producers and explorers enough incentives to encourage them to invest more —  to turn around the decline in the amount of oil coming through the TransAlaska Pipeline.  So far, he’s been looking at ways to change the current tax regime that came about in 2007.   While the focus has been on more incentives,  one of the bills already filed for this year’s legislature takes another approach – change the way the tax is calculated.

In 2006  the Revenue Department projected that North Slope oil fields this year —  in 2011—  would produce an average of 782-thousand barrels of oil per day .  But the tax in effect when that prediction was made was rewritten in 2007 and, along with it,  the production estimate has changed.  In its latest projection,  the Department foresaw only 616-thousand barrels of oil per day this year.  That’s 166-thousand barrels of oil — per day — less than was expected four years ago.  Governor Parnell’s goal is to give oil companies a reason to pump more.  And he has put the focus this year on the tax structure.

He has said that while the tax framework is good,  it needs some changes.  In October he told the Resource Development Council that making minor changes to the tax is the best thing the state can do.

I have a two-part plan to make Alaska’s oil tax regime more competititve.  First, I propose eliminating, effectively capping, progressivity and higher oil prices.  Second, I will propose tax credits for technically challenged fields, such as heavy oil fields.

While agreeing with part of the governor’s statement,  Anchorage Republican Mike Hawker believes the state’s tax incentives are already extremely generous.  He says the current tax is totally focused on costs that occur prior to production, and it’s had a chance to work.    Instead Hawker wants to change what’s called the progressivity function – the surtax on oil in production that increases as oil prices climb above a fixed base.

We have to be looking really at the overall economics of developing an oil field, which is a very long process from the initial investments.  But including also ten or fifteen or twenty years of payout over time as you’re producing.  Our current tax system rewards the initial investment.  It, on an international basis is not competitive when in comes to those out years in the operation of the field.

Hawker has a bill that he says would increase the incentive for actual production of oil.  His plan,  in its simplest description, would moderate the increasing surtax as oil prices rise.  He relates the tax to the federal income tax – instead of a fixed rate based on income, it is divided into brackets.  A person earning three hundred thousand dollars a year pays a higher tax rate than someone earning thirty thousand dollars.  He agrees that using a similar system on oil would cost the state some immediate revenue, but it would base that tax on more oil in the system to be taxed.

Under the current structure, you take that high rate of taxes and retroactively apply it back across the entire year’s production.  That’s the thing we’re looking at changing, and I’ve had very positive responses from both industry and economists who say that without changing really anything of substance in the tax structure – the credit system or the overall tax system – but by putting brackets into that progressivity, making it a stairstep effectively rather than a retroactive calculation,  it completely changes the economic calculations, the investment calculations used by the oil industry.  And I really believe it is something that can contribute to making Alaska competitive on the world market.

The bill still would have a long way to go to make it work – but here’s an example: to start with, the bottom tax would go down — reducing the base rate by five percent.  Beyond that,  if oil is priced between $52 and $73, producers would pay a twenty nine percent surtax;  between $73 and $95, they would pay thirty three percent; and when oil sells between 117 and $138, it would be taxed at forty one percent.

Hawker says the state needs to be willing to give up the idea of maximum revenue right now in exchange for continuous production at high rates for the long term.

The bill, co-sponsored by House Speaker Mike Chenault, along with Republicans Craig Johnson and Kurt Olson, will officially be read into the legislature and referred to committees the first day of the session – January 18th.


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