Legislature passes oil tax overhaul

JUNEAU — The Alaska Legislature, on the last scheduled day of session Sunday, passed a multibillion-dollar oil tax cut in the hopes it will lead to more production.

The 12-8 Senate vote came in spite of fears that the impacts of Senate Bill 21 aren’t well understood and will devastate Alaska’s budget.

“It just doesn’t add up, plain and simple,” Sen. Bert Stedman, R-Sitka, said.

The Senate had the option of agreeing to changes made in the House or taking the bill to conference committee for additional work. The House passed its version of the bill about 13 hours earlier, just after 2 a.m. Sunday.

Voting against concurrence were Sens. Dennis Egan, Johnny Ellis, Hollis French, Berta Gardner, Lyman Hoffman, Stedman, Gary Stevens and Bill Wielechowski.

The bill’s passage is a huge victory for Gov. Sean Parnell and Republicans who wrested control of the Senate from a bipartisan coalition in last year’s elections. Parnell had labeled the coalition-controlled chamber a “do nothing” Senate for not approving tax cuts that he believed were needed to boost oil production, and oil taxes became a major theme in a number of legislative races last year. The House has been under Republican control throughout Parnell’s tenure.

“We are signaling to the world that Alaska is back, ready to compete, and ready to supply more energy once again,” Parnell said in a statement, adding later: “Alaska’s oil comeback starts now.”

Alaska relies heavily on oil revenues to run. Production has been on a downward trend since the late 1980s, through a number of different tax structures, but higher prices in recent years have helped mask the budget impact.


Supporters of the tax change as a way to increase investment say Alaska would be in the same predicament — looking at budget cuts and drawing from savings — even without a tax cut. They say they need to take a bold step forward.


“It’s time to act,” Sen. Anna Fairclough, R-Eagle River, said.


Parnell took an entirely new approach on taxes this year, upending the existing structure by removing a progressive surcharge that has been credited with helping fatten state coffers and revamping a suite of credits with a goal of focusing them on new production. Industry has complained the surcharge triggered when a company’s production tax value hits $30 a barrel eats too deeply into their profits when prices are high, discouraging new investment.


The bill passed Sunday includes a 35 percent base tax rate and $5 allowance per taxable barrel of oil produced. The allowance would apply to what would be considered new oil and production that also would qualify for a 20 percent tax break known as a gross revenue exclusion. Certain units comprised exclusively of leases with higher royalty rates, and those not getting royalty relief from the state, could qualify for a 30 percent tax break.


Administration officials have said they expect the vast majority of Alaska’s legacy fields would be subject to a 35 percent base rate and a per-barrel allowance on a sliding scale, higher at lower prices, zero at higher prices, around $160.


The administration’s consultant, Barry Pulliam, said the plan would make Alaska more competitive but Ellis questioned whether it would make the state competitive enough to get the kind of investment and production Alaskans wanted or merely pushing cash over to the companies. Representatives of the North Slope’s major players said the plan should lead to more production and investment but didn’t quantify that.


The executive director of the Alaska Oil and Gas Association, Kara Moriarty, said in a statement that the most important element of the bill of the legislation is the “elimination of the high progressivity.”


“The bill creates a new framework and although SB21 as passed today is not as attractive as previous versions of the bill, it creates a tax system that is more competitive,” she said.


A fiscal analysis suggested the plan could cost Alaska up to about $4.7 billion through 2019, based on a forecast that calls for continued production decline and oil prices between $109 and $118 a barrel. Critics have charged the plan could cost far more, given the narrow band of prices on which the analyses have been based. They also have questioned the quality of information that has come from the consultants.


Questions and confusion over the numbers and how they’re presented came to the fore on the Senate floor, after former Senate Finance Committee co-chairs Stedman and Hoffman spoke. Stedman said the plan if it were in place last year would have cost the state about $1.7 billion in the legacy fields of Prudhoe Bay and Kuparuk alone compared the existing structure. Hoffman said if the taxes were in place it could mean a $1.6 billion draw on savings for next year. He said it’s not clear how much oil it would take to make up for that or how far in the future that might come.


Shortly thereafter, there was a brief recess during which some senators tried to sort out numbers. Deputy Natural Resources Commissioner Joe Balash, who has helped carry the bill and was in the gallery, said Stedman’s numbers didn’t represent the full picture. And Sen. Kevin Meyer, R-Anchorage, who had the same chart as Hoffman, later said he disagreed with how Hoffman interpreted it and said the potential deficit would be closer to about $600 million next year.


Meyer said that also assumed no new production, and he said the whole point of making the tax change was to increase production.


Wielechowksi, D-Anchorage, said he was concerned the gross revenue exclusions could be exploited. French, D-Anchorage, said passage of the bill would lead to a personal income tax and loss of Alaskans’ Permanent Fund dividends.


“I know for a fact that’s beyond contention this will lead to greater profits for the oil industry while it leads, I’m concerned, while it leads towards the impoverishment of the state,” he said.


Ellis, D-Anchorage, said the future of Alaska is on the line. Sen. Cathy Giessel, R-Anchorage, agreed, and that’s why she said she supported the bill. She proclaimed SB21 “excellent.”


“Voting for this votes for a future for Alaska, increased revenue, jobs for our kids and future generations and it also puts off … and may actually completely push away that fiscal cliff that we’re facing as we have this ongoing decline in production,” she said. “This will help bring more oil into the pipeline.”