Recently, the Alaska State House Resource Committee passed HB 110 that is aimed at reducing the tax on oil. Currently, Alaskan oil is taxed under the Alaska’s Clear and Equitable Share. It has a key component of triggering a higher tax rate when oil prices rise, known as a progressive component. When it was first enacted, it was aimed at “reclaiming” windfall profits from oil companies. An oil surcharge is imposed is and when the price of oil spikes; depending on the cost of oil, a 25% surcharge tax is imposed at around $56.00 a barrel. The tax rate increases as the price of oil increases.
When ACES was passed, the world was a different place. Back then, high oil prices were viewed as excess profit seeking and downright greed on the part of petroleum companies. Back then, dictators in the Middle East and other places maintained the political stability for oil production in many oil producing nations. In exchange for peace, these dictators often were able to extract tax rates up to 40%. Back then, the President of the US did not use every regulatory trick in the book to prevent production. It actually encouraged domestic oil production. Back then, Alaska could compare its tax rates to foreign countries and keep it lower than Bahrain’s tax, rather than compete with states like North Dakota, Louisiana, and California. Back then, the world was a different place.
Times change, and the number of third world dictators garnering 40% tax rates from oil companies have dwindled. However, so has access to those fields, at least for a time. Extreme political events have created disruptions in the supply of oil; so severe that oil futures have traded recently near $200 a barrel. In 2007, $80.00 a barrel would have been considered outrageous. Today, it would be considered a bargain. Back then, China and India were emerging and their demand for oil was growing. But now, in 2011, they have emerged, and they also have a demand for oil that rival‘s America‘s energy needs. Their demand has created a higher structural component in the demand for oil. The days of $9.00 a barrel for oil are long gone, as are the days of American dominance in the global demand for oil equation.
Once we had presidents that favored private sector activity. Oil companies nationally now face an openly hostile regulatory environment. Moratoriums, permit approval slowdowns (often dubbed permitatoriums), and the creation of new and bizarre regulations from the mind of the current Secretary of the Interior have created a hostile environment for oil companies. Oil companies, such as Shell, have invested millions in the production of wells that it may never recover due to the fear of catastrophic environmental damage on the part of the Secretary of the Interior. Despite the fact that our own nation does not drill, it should be noted that Cuba, China, Malaysia, and Russia have all announced intentions to drill in the Gulf of Mexico. They will not have to face the environmental regulations that American companies have to endure, and will have a clear cost advantage if they are allowed to drill there.
While oil fields outside the US are in a state of chaos, the same cannot be said for oil fields in the United States. Louisiana modified there taxes in 2007; historically their taxes have ran around 12% of value. California moved toward capping their oil tax at a lower rate. Most importantly, North Dakota began an aggressive program to attract oil companies. North Dakota taxes oil at 6.4% or lower on value (depending on well size) and has a 2% tax rate for smaller wells. When combined with their corporate tax rate, a large producer would face less than 15% in taxes. When compared to marginal tax rates that could climb to 75% in Alaska, North Dakota was able to attract investment.
Other things have happened quietly over time. While some like Senator Hollis French tout the success of the ACES program; but things have changed north of Anchorage. As the cost of production began to rise on a per barrel basis, oil companies were quietly disinvesting. British Petroleum cut its budgets by 30%, Shell’s drilling fell from 22 wells to 7 by 2010, and Conoco-Phillips canceled drilling in Alaska (Stone). Businesses related to the oil industry began to see the decline in the demand for their services (Cruz). As oil companies have voted with their feet out of the state, the entire business climate has dampened. Businesses in related industries, and those not so related, have formed lobbying groups to urge the state to cut the tax.
The situation has placed Alaska between a glacier and a hard place. On one hand, the revenue to be gained by keeping ACES is substantial in the short run. Cutting ACES, as proposed under HB110 could result in budgetary shortfalls. Estimates vary, but anywhere from one fourth to one third of Alaska’s current state revenue could be lost by HB110. Sadly, the state doesn’t have sufficient data to know for certain, because data reporting requirements on businesses are minimal. The state presumably has enough in savings to cover a $1.5 billion deficit, for the current year. However, it is unclear what remains for future years. As long as the state squirrels away their econometric modeling procedures like a squirrel hides acorns, we will just have to take their word for whatever estimates they produce.
It is clear that the state needs to cut its tax rate on oil, and probably pretty quickly. The question is how much. No industry would stay in a state when it faces a 75% marginal tax rate. In order to attract investment, the tax cut has to have an effective tax rate has to be lower than other states to attract oil producers. The tax rate has to place a firm at least “tax neutral” with respect to the competing states, and perhaps slightly lower than that to cover the higher cost of doing business in Alaska. At the same time, there are the realities of government. There has to be time for firms to invest, and begin producing for the revenue stream to rise. No one in the state wants to cut taxes and induce a large budget deficits. Taking out the progressivity must be followed with fiscal restraint. This is particularly the case when the state is also proposing large scale projects like the Susitna Dam, or other unforeseen budgetary items. One thing that is certain, passage of HB110, or a similar bill, is needed to revitalize Alaska’s oil production, and caution is needed to minimize any unanticipated state budgetary deficits.
Alaska Department of Revenue, Alaska’s Clear and Equitable Share Report, 1/14/2010.
http://www.revenue.state.ak.us/1-14-10%20ACES%20Status%20Report%20final2%20(3).pdf
Bradner, Tim “House committee approves governor's oil tax change” Journal of Commerce 03/04/2011
http://www.alaskajournal.com/stories/030411/loc_hcago.shtmlhttp://www.alaskajournal.com/stories/030411/loc_hcago.shtml
Bradner, Tim “Murkowski speaks to lawmakers on oil, fuels” Peninsula Clarion 3/8/2011
http://www.peninsulaclarion.com/stories/030811/new_796446978.shtml
Cruz, David, “Oil tax burden creates a ripple effect” Anchorage Daily News, March 7, 2011
http://www.adn.com/2011/03/07/1742106/oil-tax-burden-creates-a-ripple.html
French, Hollis. “My turn: Alaska's Clear and Equitable Share Measure is Successful” Juneau Empire12/10/2009
Hiltzik, Michael “A California Tax on Drilling?” Los Angeles Times July 15, 2009http://articles.latimes.com/2009/jun/15/business/fi-hiltzik15
Joling, Dan “Business coalition urges Alaska oil tax fix” Washington Examiner 02/23/11
http://washingtonexaminer.com/news/2011/02/business-coalition-urges-alaska-oil-tax-fix
Smith, Doug, “HB 110 would spur North Slope Investment,” Anchorage Daily News 2/27/2011
http://www.adn.com/2011/02/27/1726300/hb-110-would-spur-north-slope.html
Stone, Daniel “ A Pipeline Problem in Alaska” Newsweek 10/9/2010
http://www.newsweek.com/2010/10/09/alaska-oil-cos-balk-at-prudhoe-bay-tax-slap.html#http://www.juneauempire.com/stories/121009/opi_534186921.shtml
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