Coalition Endorses "Meaningful" Oil Tax Reform in Alaska

ANCHORAGE, Alaska — This Afternoon (Tuesday) a coalition of Alaska business leaders -- and a former Alaska Governor (Tony Knowles) -- got together to endorse "meaningful tax reform" at the North Slope. But the group stopped short of saying precisely what "meaningful tax reform" would entail.

The Coalition did say they hoped it would include tax reductions at existing oil fields on the North Slope. 

The "Make Alaska Competitive Coalition" contends that oil production at the North Slope is declining, in part, because of the state's tax policy. They say the ACES tax system, enacted by the Palin Administration, is discouraging spending by the "Big Three" oil companies aimed at pulling additional output from existing fields.

With that, the group stepped in to a heated controversy.

Governor Sean Parnell is also an opponent of ACES. Earlier this year,  the governor used used precisely the same term that the coalition used today when talking about the North Slope. "Meaningful tax reform" was the administration's mantra in the 2012 legislative session.

But Parnells' tax proposal was roundly rejected by the Alaska State Senate this session. The Senate judged to Parnell's tax cuts to be far too generous. In fact, Senator Hollis French characterized them as a "giveaway". Today, however, the coalition stopped short of saying it was specifically endorsing the Parnell tax plan. Nor would it whether say it endorsed an alternate plan by the Alaska State Senate Bipartisan Majority. However, the group sounded as if it believed the Senate's tax-reform proposals did not go far enough.

The Bipartisan Majority has been struggling with the oil tax issue for more than two years. This spring it decided that the reforms should center on the state providing additional tax credits to companies for finding and producing oil from NEW fields in Alaska. Senator Bert Stedman's Committee -- which looked into the matter -- also wanted modest reductions on oil taxes at prices above $130 per barrel.

No compromise could be ironed out between the Senate and the Governor, so the ACES tax structure remains in place. The fact is though, that Alaska state revenues -- under ACES -- have doubled since it was enacted in 2006.

The issue of how to reform taxes is a delicate one. State Senators felt bamboozled by the oil companies in 2005. That is when they discovered that the oil companies were paying less than a 1 percent production tax on Kuparuk. It just so happens that Kuparuk is the second biggest oil field in North America. Only Prudhoe Bay is larger. And Senators negotiated that disastrous tax reform with an Alaska Revenue Commissioner who later decided to work for the very oil company that benefited under the new tax plan! The Kuparuk problem has since been corrected under ACES. But no State Senator wants to engage in an oil-tax reform plan that unexpectedly leads to another Kuparuk.

But Kuparuk was a single mistake -- one that the state eventually corrected.

The "Make Alaska Competitive Coalition" argues that reducing taxes on existing fields can lead to production increases. They claim it happened in Alberta Canada -- where an oil tax cut was followed by increased output from the fields there.
 
And that is where the issue stands -- unresolved. One side says cutting taxes on existing field does make a difference, the other insists that tax cuts must be far more selective and targeted. 

How that question is ultimately answered could profoundly affect the fate of Alaska.

Oil represents 90% of state government operating expenses. In the past 5 years, production from the North Slope has declined 27 percent -- from 734,000 barrels-a-day in 2007, to 525,000 barrels a day tonight. Declines at Prudhoe Bay continue to run at between 3 and 6 percent a year. And the fear is, if they are not reversed soon, the state could find itself in serious financial trouble.

Tonight, the $59 million dollar question is how to turn that decline around. $59 million dollars a day is the amount of money the pipeline generated at today's prices.

Alaska's oil tax system that is one that everyone agrees needs changing. But so far there is no concensus on just how to change it.