Close the Hilcorp loophole today—save jobs and the PFD

Alaskans have had plenty of time to understand the Hilcorp loophole and how to plug it.

The compromise gas line bill up in the Legislature today would do the job. Ignore the moaning and groaning from Hilcorp and the members of the oil company mutual aid and benevolent society.

Here is the Anchorage Daily News coverage of the revised bill.

Republican members of the Legislature are pretending that no one has studied or analyzed this matter, which is not true.

The gridlock in state government, enabled by Gov. Mike Dunleavy, his allies in the Legislature and the death grip the oil companies have on the GOP, have combined to prevent the state from closing the loophole.

If we really want to save jobs and the PFD, closing the Hilcorp loophole is one of the crucial steps, which is what the Republicans in the Legislature won’t admit.

Nearly three months after Dunleavy was elected in 2018, Hilcorp owner Jeff Hildebrand donated $25,000 to the campaign group that had promoted Dunleavy and was largely funded by Dunleavy’s brother in Texas and Bob Penney.

As that year progressed, the Dunleavy administration mostly took a hands-off attitude to the BP sale of its North Slope assets to Hilcorp and never proposed a change in the corporate tax law to close the loophole. Dunleavy reversed himself on the loophole in 2021, but later abandoned that position.

Hilcorp is the largest business in Alaska not subject to a corporate income tax.

Here is a column that appeared in this space on August 28, 2019:

Hilcorp registered in Alaska in 2011, as HIlcorp Alaska, LLC, 100 percent owned by Hilcorp Energy I.L.P., based in Houston.

As a limited liability company, Hilcorp does not have to pay the oil and gas corporate income tax that BP has long paid in Alaska, a tax under which BP may be paying $30 million a year or more.

“Corporate income tax is levied on oil and gas C-corporations as a percentage of their worldwide net income apportioned to Alaska,” the state’s revenue sources book says.

The petroleum corporate income tax is estimated to produce $210 million in this fiscal year, with most of that paid by ConocoPhillips, Exxon and BP.

HIlcorp does not pay that tax since it is not a C-corporation.

The sale of BP’s Alaska assets to Hilcorp, a privately held company controlled by Texas billionaire Jeff Hildebrand, is one reason why the Alaska Legislature needs to revise the state oil tax structure as soon as possible.

If BP is paying $30 million, (we don’t know the amount because that is confidential), the loss of that sum would be enough to allow Alaska schools to keep up with inflation each year, said former Rep. Les Gara.

Gara tried as a legislator to amend state tax law so that companies like Hilcorp would pay an income tax, but in 2017 the Senate refused to consider any tax measures, killing the effort.

The measure Gara introduced that year, HB 36, is a good starting point for the debate that must begin about oil taxes.

“Under HB 36, oil companies that are not already subject to the corporate tax will be taxed at the same rate and in the same manner as the current corporate tax for oil companies that are C-corporations,” he wrote in 2017.

As it is, Hilcorp stands to be the largest business in Alaska not subject to a corporate income tax.

Businesses used to pay tax under the state income tax law, but it was repealed in 1980. Those that are not C-corporations have not paid state income taxes since then.

Only Alaska and Florida have taxes on C-corporations, but fully exempt the income of “pass-through businesses,” such as limited liability companies.

“As early as 1998, Alaska Deputy Revenue Commissioner Deborah Vogt observed that ‘[i]n a place that doesn’t have a state income tax you’d be an idiot to start up a C-corporation.’” Matthew Gardner of the Institute on Taxation and Economic Policy, wrote in testimony on Gara’s bill.

The Hilcorp situation is only one of the aspects of oil taxation that needs a new review by Alaska. Another is the production tax rate and the tax credits under existing law.

The oil and gas tax initiative is going to lead to a healthy statewide conversation on the topic, which has been suppressed for too long by gridlock in state government.

Six years later, the loophole remains

The oil and gas tax initiative mentioned in the preceding paragraph went on the ballot in November 2020 and failed because of a giant oil industry ad campaign, claiming to “save jobs and the PFD.”

The Alaska oil companies and their supporters called on the Legislature to make decisions on oil taxes, claiming that complicated decisions should not be made by a ballot measure. The ballot measure came about because the Legislature and governor blocked any compromise measure.

“This ballot measure goes too far. It is bad for jobs and puts our economy at risk. There has to be a better way for Alaska,” the oil companies said through their front group, “OneAlaska.”

“We can make a better future for Alaska. Together,” the oil industry front group promised.

Of course the oil industry had no interest in coming to the table and continues with a talking point that never goes out of style—any tax increase will be catastrophic.

ExxonMobil, BP, ConocoPhillips and Hilcorp spent hundreds of thousands in staff time and at least $25 million on the “woe is me” PR campaign in 2020 that paid off at the polls.

Erec Isaacson, the president of ConocoPhillips Alaska, wasn’t living in Alaska in 2020 to witness the campaign for and against Ballot Measure No. 1 to raise oil taxes on the most profitable fields.

But after taking his current position in 2021, he said “As an industry we went out and educated the people of Alaska about the importance of having a competitive oil and gas industry here in the state.”

“And so as a result of that we defeated Ballot Measure 1 by a 16-point margin, a huge margin.”

OneAlaska said that oil taxes should be decided upon by the Legislature out in the open and that defeating the ballot measure was a way to “save jobs and the PFD.”

OneAlaska vanished after the 2020 election and the oil industry made no effort to push the Legislature to look at oil taxes in the open or to “save jobs and the PFD.”

The oil industry promises in 2020 that the Legislature is the proper place to thoroughly consider oil taxes and that the industry will help save the PFD are all but forgotten.

OneAlaska pretended to be a mom-and-pop enterprise created to unify Alaskans, with no interest in benefiting corporate leaders in Houston and stockholders who want dividends, but not the Permanent Fund kind.

The “sky is falling” rhetoric ignored the reality that the main impact of the initiative, with oil prices low, would have been to raise the minimum tax to 10 percent, which is reasonable. The initiative was the only short-term revenue option open to the state.

The so-called “Alaska leadership team” of OneAlaska did not include the real leaders—executives of the oil companies who spent $25 million or more to influence the vote in Alaska.

The Legislature should not hesitate to approve the gas line bill with the provision to close the Hilcorp loophole attached.

Rep. Kevin McCabe gave the Anchorage Daily News a recycled version of the OneAlaska talking point from 2020—claimign that closing the loophole is a “major policy decision that deserves its own bill, its own hearings, and its own public debate.”

Years have passed, many hearings have been held and there has been a lot of public debate.

If Dunleavy vetoes the bill, it will be because his desire to shield the billionaire owner of Hilcorp from a tax that applies to the other oil giants is more important to him than his desire to promote a gas pipeline.

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