JUNEAU, Alaska — The state Senate decided at the last possible moment Thursday not to have a floor debate on one of its key pieces of legislation in the 2012 session -- oil tax reform.
The bill had finally come out of committee Wednesday evening, and its failure to reach the Senate floor Thursday was a big surprise to everyone.
It's a sign of how nervous and how careful everyone is, during the negotiation of a bill that could cost the state hundreds of millions, even billions of dollars.
By late Thursday afternoon, attempts to get Senate Bill 192 to the Senate floor were completely dropped, and the measure was sent to the Rules Committee for more negotiations.
There isn't much time left, with just three days left in this legislative session. Gov. Sean Parnell has said that if Senate Bill 192 isn't delivered to the House of Representatives by Sunday, it won't be part of any special session -- and the oil companies will have to wait at least another year to find out what their tax structure will be.
On Tuesday, Rep. Les Gara (D-Anchorage) described the revisiting of oil taxes year after year as potentially damaging to the state. He warned that with a "constantly dangling carrot," lawmakers may actually be encouraging oil companies to delay investment, hoping they'll get a better deal next year.
If Gara's right, the state could be contributing to the very problem it's seeking to solve: declining North Slope oil production, which has diminished from peak production of 2 million barrels a day in the late 1980s to 575,000 barrels a day today -- and continues to fall 6 percent a year.
There's widespread agreement among lawmakers that oil companies are now probably taxed too high when oil prices are $120 or more. SB 192 seeks to change that by slightly lowering the state's oil taxes at higher prices, and also having the progressivity rate flatten out.
State Senate Oil Tax Bill Doesn't Reach Floor, Sent to Rules Committee
Parnell's bill, House Bill 110, is considerably more generous to the oil companies than the Senate version, but the governor contends that the industry has promised billions of dollars in further investments if his plan is passed.
The question is, where to draw the line? The Senate plan offers the oil companies about $750,000 a day in tax breaks at today's prices. The governor's plan offers almost $5 million a day when oil is priced at $150 a barrel.
Everyone remembers painful lessons from the past. State Sen. Bert Stedman (R-Sitka), the chair of the Senate Finance Committee, feels that Alaska was out-negotiated on what is known as the ELF tax. Under that tax, the second-greatest oil field in North America -- Kuparak -- ended up paying severance taxes of 1 percent or less. It was a mistake that cost the state hundreds of millions, if not billions of dollars.
Sen. Bill Wielechowski (D-Anchorage) warns that not only did ELF cost the state money, it ended up leading to further declines in production and to diminishing jobs and investment at Kuparak, making him want to proceed cautiously with oil tax reform.
Then there is the oil tax negotiation that the late Jay Hammond -- probably Alaska's most beloved governor -- called one of the two greatest mistakes of his administration. Back in 1982, Hammond had the oil companies switch to a tax system called worldwide apportionment. It's been likened to "going dutch" on a meal -- one that cost the state billions of dollars.
Worldwide apportionment, which is still in effect, is similar to going out with friends and ordering dinner at a restaurant, with an agreement to split the cost evenly: if you order hamburger and your friends order lobster, you end up getting cheated.
Hammond's system allows the oil companies to deduct from their state income taxes expenses they incur anywhere in the world. If an oil well blows out in the Gulf of Mexico or oil production in a country is temporarily halted due to political upheaval, the costs of those events to a company, minus fines and penalties, are deductible here in Alaska -- although the incidents have nothing to do with the state.
The state Department of Revenue has run the numbers to compare the old system of taxation in Alaska, separate accounting, with worldwide apportionment.
In the first year of the switch the state lost more than $595 million in revenue, followed by $560 million in the second, $517 million in the third and an astonishing $628 million in the fourth. The numbers just keep going on and on like that, anywhere from tens of millions to hundreds of millions of dollars lost each year.
When the state's numbers are all added up, the switch to worldwide apportionment has so far cost the state $7.3 billion. It's never returned to separate accounting, which is more like going to that same restaurant and getting separate checks.
If your friend ordered lobster at that hypothetical dinner in 1982, it's probable you would have learned your lesson and started demanding separate checks. But Alaska has not seen fit to change.
Concerns like these are behind lawmakers' fear of changing the system, since many are afraid of being seen as the people who gave away the store. And since oil company revenues make up approximately 90 percent of the state's operating budget, it's urgent that this tax reform be done right.
Meanwhile, North Slope production is expected to slip to about 560,000 barrels annually by this time next year. No one thinks the decline can be flattened in less than two years, and whether it is flattened -- and turned around in a reasonable amount of time -- may depend heavily on events in Juneau this weekend.
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