Standard Deduction

By Dave Donaldson

The governor and many legislators this year have set changing the state’s tax on oil as the top goal for the session. 

As work gets underway,  the focus is on two bills that, basically, do the same thing – they lower the surtax on oil as prices climb.   Estimates by the Parnell administration show that change would cost the state an average of about a Billion dollars a year.

However, there’s also legislative interest in re-imposing what’s called the “standard deduction” – part of the 2007 oil tax that temporarily provided a cap on some deductions the oil industry can now take.

The “standard deduction” — a cap on deductible expenses for older, legacy oilfields like Prudhoe Bay and Kuparuk — was allowed to expire last year with little fanfare.   While it was in place, it was costing the industry and earning the state about a hundred fifty million dollars a year by limiting what producers claimed against their taxes.  Since it went away – as the tax law originally called for – that’s a hundred fifty million dollars less going into the Treasury.

Juneau Democrat Beth Kerttula – a former state tax attorney — says the standard deduction protected the state from oil companies’ possibly misusing a profitable loophole.

Oil brings us ninety to ninety five percent of our state budget.  And this is our resource.  We have to protect it, we have to build for the future, and something like this – this small part of an intricate statute can mean millions of dollars every year to Alaskans.  It was a smart thing to do.

The standard deduction was put into the 2007 tax law as a limitation of what many legislators saw as an exorbitant amount of expenses that had been taken on those legacy fields in the past.   However, the cap was only temporary.   It was scheduled for three years only and its deadline passed last year.   Majority lawmakers who were a part of that decision,  say it did its job and needs to be put to rest.

Republican Paul Seaton of Homer co-chairs the House Rules Committee where the two oil tax bills so far this year have been sent.  He says the state has learned what it costs to operate an oil field.

I don’t think there was ever an intent to say there shouldn’t be a recovery of the cost.  It was just that we needed to protect ourselves for the time being because we wouldn’t be able to analyze what those costs were until there was enough time.

Others are more actively opposed to reinstalling the cap on expenses.  Anchorage Republican Mike Hawker introduced one of the gas bills already in the mix.  He says that oil investment geared toward production needs to be increased,  and the standard deduction works in the opposite direction because it is not based on current investment needs.  He says that put those legacy fields at a competitive disadvantage for company investment capital.

By economically disadvantaging two of the most productive fields, this exacerbated the decline and production because even our own best prospects for increased and enhanced recovery didn’t secure the necessary investment at the time.  A company working in the state of Alaska couple spend that same money in an adjacent field and get full value for it.

Senate Finance Co-Chairman Bert Stedman says the state Revenue Department has already targeted $850-million dollars for oil companies to use as production incentive credits in the budget now before lawmakers.

Anchorage Democrat Mike Doogan – a member of the House Finance Committee – says that puts the entire tax question in a different light.

I think we need to revisit oil taxes in exactly the opposite direction from what the governor wants to do.  Cause he wants this plus another Billion dollars a year.  And I think it’s possible we’re giving away too much money right now.

No hearings have yet been scheduled for any pending tax legislation .


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