Oil tax cut means state income or sales tax more likely
Opinion Piece by Senator Hollis French
February 7, 2013
Reducing Alaskan oil taxes without an explicit linkage to more Alaskan investment is just bad business. That’s what I learned from spending all of last summer and fall talking to voters, one at a time. The majority of them told me that the right approach to oil tax reform was to be business-like in our dealings with the oil industry. Lowering oil taxes is fine, they told me, if it leads to more Alaskan jobs, more wells, more oil in the pipeline.
Unfortunately, the governor’s oil tax bill does nothing to assure more investment on the North Slope. Worse, it hastens the day when you will be told you must pay a state income tax, or a state sales tax, or give up most of your Permanent Fund Dividend. Should his bill pass, the state will begin drawing down the savings accounts that the Legislature wisely built up the past few years. Once those savings are depleted, you will have to pay.
The governor’s bill sets a 25 percent flat tax rate that does not go up. So while oil company profits soar the state’s share remains fixed. Right now, under ACES, ConocoPhillips is making about $6.2 million every day in net profits in Alaska. BP and ExxonMobil, who are not required to report their Alaskan profits separately, probably make about the same.
The governor’s bill would increase ConocoPhillips’ $6.2 million daily profit at the expense of state revenues. What do we Alaskans, who own that oil resource in common, get in exchange? Basically nothing. The bad news is that the governor’s bill does not require any specific performance from oil companies to qualify for this lower tax. Not one dollar more of investment is demanded. If the governor’s bill becomes law, the industry is free to take its increased Alaskan profits and invest them anywhere else in the world.
This is not the approach that I will be advocating for this year in Juneau. I’m working with my colleagues on a bill that ties reductions in our oil tax to investment in Alaska. I believe that ACES is a good system, but like any tax system, it can always be made better. We all want to see more development on the North Slope. We all want to see a full pipeline. But we have to be smart enough, and firm enough, to not get taken in the process. Alaska’s history is full of examples that should teach us to be hyper-vigilant when setting oil tax policy.
Indeed, we as a state once tried a ‘lower taxes and hope’ approach similar to the one now being advanced by the governor. Under the system known as ELF, tax rates in practically every oil field in Alaska dropped steadily. To take just one example, the production tax rate at the Kuparuk field, the second largest oil field in North America, was 12 percent in 1996 and it steadily dropped over the next ten years until it went below 1 percent in 2006. Think about that. We conducted a 10 year real-time experiment in dropping oil taxes on a major North Slope field. Did production go up? No. The Kuparuk field declined at a steady 7 percent throughout that time period. Dropping the tax rate by itself was not enough to ‘fill the pipe.’
To make matters worse, the money the oil industry was making in Alaska during that low-tax era was flowing out of the state. You don’t have to take my word on that. BP said so explicitly in an official company document. The memo, marked “Restricted,” came to light during a court battle. It’s dated February 9, 2004 and it says: “Alaska’s role in BP’s portfolio is to provide a stable production base and cash flow to fuel growth elsewhere in the business.”
Elsewhere. This is why many of us in the Legislature can seem stubborn at times when it comes to granting tax breaks. Done the wrong way, oil tax reform leaves Alaskans empty-handed. Do it right, and both sides can prosper.