Cutting Alaska oil tax rate to 25 percent could boost state revenue by a half-billion

The state could cut the net profits tax on oil companies from 35 percent to 25 percent and raise about a half-billion in new revenue if oil averages $57 a barrel in the next fiscal year. It would be $700 million if oil averages $67 a barrel.

I know that doesn't make any sense. But we have a system that is short on sense.

In enacting the SB 21 oil tax law in 2013, the Legislature and former Gov. Sean Parnell said it contained a flat 35 percent tax. It was simple, Parnell said.

"Gone are the days of complicated, ever-changing monthly tax-rate calculations. Alaska’s oil tax system will now be built around a 35 percent base rate and tax incentives tied directly to new oil production," Parnell said five years ago when he signed SB 21. "In other words - oil producers, if you want the tax incentives, there is no 'try,' there is only 'do.' Get that oil flowing."

But there was no try and there was no do. Parnell gave a simple and inaccurate depiction of one of the main tax incentives in the law he took to calling the More Alaska Production Act, though the bill was never named that. 

The law has what is called a "sliding scale per barrel credit" that peaks at $8 per barrel when oil is near $80 and drops to zero when oil is double that amount. The tax incentive is not based on production, but on price.

The $80 per barrel price, with the accompanying maximum $8 credit, was deemed unlikely in 2013 when SB 21 passed the Senate 11-9, with Fairbanks Sen. Click Bishop providing the deciding vote.

As I've argued in the past, the per barrel credit language was deceptive.  The result of this feature in the law is that the 35 percent flat tax is a myth.

At a hearing last year, ExxonMobil tax attorney Dan Seckers complained that the tax is 35 percent and it is much too high. Anchorage Rep. Les Gara challenged him, saying that only when oil hits $160 a barrel does the tax climb to 35 percent.

At $60 per barrel, the effective tax rate is 12.1 percent, according to the Department of Revenue.

But the ExxonMobil attorney protested.  "Sorry, I think you've misspoken on this," he told Gara. "The statutory tax rate in Alaska is 35 percent. You don't believe me? Ask your director of tax under Section 011e."

Believe it or not, the 35 percent tax mentioned in Section 011e is collected if and when oil hits $160 a barrel, which hasn't happened. The lesson here is that oil company tax attorneys like number games when it is in their interest to play.

It was only after the simple SB 21 became law that the oil industry and its allies in Juneau began to say that the goal was never to have an effective tax rate of 35 percent. They also began to claim that the word "credit" was a misnomer. This was a system to provide lower taxes at lower prices, they said.

In 2013, the oil industry, the Republicans in the Legislature and Parnell had no qualms about calling the per barrel credit a credit, which is how the language entered state law. No one can say exactly where the plan came from, but the sliding scale appeared in a committee bill on April 2, 2013.

In a press release from Gara Thursday, the Anchorage representative said that had the Legislature approved the version of HB 111 backed by the House a year ago and reduced the statutory tax rate from 35 percent to 25 percent and done away with the sliding credit scheme, the state would pick up a half-billion to nearly $700 million in revenue.

That would simplify things and ExxonMobil would no longer have to complain about a  35 percent tax rate in Alaska. As these prices, the oil tax rate in Alaska is "vastly lower" than in North Dakota, Louisiana and Texas, Gara said.

The Alaska Senate is not about to take his advice. But Gara has a good point.

At a time when the state Senate, the House and governor believe we need to cut the Permanent Fund dividend by $700 million or $800 million, it would be easier to sell that to the public if the oil industry was included in a fiscal plan compromise that hits all sectors of Alaska.

Oil taxes and other options—such as an income tax and unidentified budget cuts of up to $1 billion—are not either-or choices, but we should drop the pretense that there are no tradeoffs and that the dividend cut has nothing to do with oil taxes or an income tax. That much is simple.

Dermot Cole4 Comments