The tax restructuring was designed to create a bonanza for the industry on the promise it will also be a boon for the state's beleaguered public treasury by incentivizing more drilling. But the oil industry isn't quite done sopping up the cash. It's now complaining that draft rules for implementing the law aren't as good as they would be if it had written them. Good enough for whom isn't a question you're supposed to ask, so hush.
Alaska depends on oil for about 90 percent of its government revenue. The reality of the new law is that it will give billions to corporations that are already the most profitable in world history and take away billions needed, among other things, to fund schools, provide public safety, maintain parks, clear and maintain roads, and keep bridges from falling down.
Oil production has been on a steep decline in Alaska since 1988 when the state pumped two million barrels a day until last year when it pumped just 500,000. Revenue the state depends on has declined as well, and there is nothing to take up the slack. Alaska has no state income tax or sales tax, and its gasoline tax, at eight cents a gallon, is the lowest in the United States.
Shocking as it may be to all of us who have watched the trajectory of one Sarah Palin, it was she who as governor pushed through the current progressive tax production structure in 2007. It's called Alaska's Clear and Equitable Share, or ACES. That restructuring generated $6.8 billion in tax revenue in 2008, which was $2.4 billion more than it would have under the old policy, according to an Alaska Department of Revenue report. In fact, over the six years ACES has been in effect, it has raised $20 billion more for the state coffers than it would have under the old system.
Alaskans who don't like Gov. Parnell's tax cut and doubt that it will generate the promised revenue aren't going along without a fight. They had gathered enough signatures by the end of July to put a repeal of the new law onto the August 2014 primary ballot.
Meanwhile, with the restructuring set to take effect in January, the state has asked industry what it thinks of the rules proposed for implementation of the restructured tax. Predictably, industry has responded that it doesn't much care for them, and if they aren't fixed to its satisfaction, the promised revenue may not be forthcoming.
Read more about the rip-off below the fold.
The tax in its current form is complex and so is the change. The short version: Currently, the basic tax liability is 25 percent of the gross value at the point of production. Depending on a variety of factors, including where in Alaska the oil is produced and how much the companies are getting per barrel, surcharges amounting to as much as 50 percent could be added to that 25 percent, a total of 75 percent. But exceptions for things like capital expenditures brings that down. The new tax, on the other hand, when it becomes effective in January, sets a flat rate of 35 percent with no surcharges, but with many of the incentives remaining in place. The effective rate, what really gets charged, could thus fall as low as 14 percent.
But, but, but, says industry, the lower tax rate will generate more revenue because it will increase oil production. Sure. Just like lower taxes always do.
With the law set to take effect in less than five months, working out the details has run into a snag because industry thinks it's too complicated, according to a ConocoPhillips spokeswoman. That is bunk, says Bruce Tangeman, deputy commissioner with the Department of Revenue. Well, he didn't say "bunk," but he did say the new law is far simpler than ACES, which required more than 70 new rules when it was passed.
The key issue is about measurements. Which is twofold.
First is how to tally what is "new oil" that gets a 20 percent-30 percent exclusion under the new law. And second, how to actually meter production. Oil that comes from an untapped reservoir is clearly "new." But what about oil from a new well in an already-producing area where the stuff can easily migrate into "legacy" fields? If the old oil gets counted as new oil, the loss for the state could be immense. The Conoco-Phillips spokeswoman complained that the state is demanding evidence that is too daunting.
And then there's the issue of actual gauges. The state wants more accurate ones in place and they want them in place earlier. Industry thinks it's too expensive to put gauges on all wells—$750,000 is the price for some gauges and their operational cost is high, too:
The state is open to hearing their ideas, said Tangeman after the meeting.
"Common sense is you put a meter on (a well) and you measure it," he said. "That's the simplest, highest standard there is. If there's something other than that, I'm looking forward to seeing what they respond with."
Let me predict, sir, that the industry will suggest what it so often suggests: Trust us. Not doing so is exactly why the tax restructuring repeal will be on the ballot next year.