As the oil tax debate over ACES heats up, headlines are dominated by talk about empty pipelines and empty coffers. In a highly charged environment, the Parnell administration advocates a $2-billion a year oil tax cut, and on the other side, the Senate Bipartisan Majority suggests something more modest and targeted. What's striking is that the discussion is fundamentally a disagreement about tax rates, rather than revenue structure. It's about money, not method. That's too bad because over the long haul, Alaska would be better off if we changed our revenue system to something more stable and less political. We could benefit from the experience of many other oil provinces around the world and move from a tax-based oil revenue system to a contract-based system.
There is a consensus that state policies and systems should encourage production and secure a fair-market price for our oil. From the Alaskan perspective, a contract-based system does a better job at arriving at these goals because it puts business decisions in the hands of experts, rather than politicians, and because it is more predictable, more certain and more stable. It reduces risk and thereby brightens the investment climate.
Currently, the state of Alaska generates oil revenue from four sources -- property tax, corporate income tax, royalty (which is negotiable, but usually the state's one-eighth share from production), and severance (the selling price for the oil "severed" from the state). The debate about ACES is a debate about severance. A major difficulty with ACES is that it is a complex net profits tax -- akin to an income tax. Normally, you sell something using a contract that defines the terms of the exchange. It's always seemed peculiar that Alaska gets severance value for its oil using a tax instead of a contract -- the tool that's being used doesn't fit the purpose of getting a fair price for selling our oil.
Because it's the wrong tool, it's no wonder that ACES is so complicated that it took years for the regulations to be written following its passage. On top of that, as the current debate illustrates, oil taxes are regularly subject to change because there are irresistible political and economic forces compelling the state government to repeatedly tinker with the oil revenue stream.
A friend recently remarked that politicians don't magically become oil experts when they're elected. The corollary is that oil companies have a primary responsibility to their shareholders, not to Alaskans. So, a well-designed oil revenue system should recognize that politicians aren't oil experts and take the politics and the politicians out of micro-management, in much the same way we don't let politicians make investment decisions for the Permanent Fund. At the same time, a well-designed oil revenue system has to protect Alaska's interests in a highly technical and competitive marketplace.
In Alaska, oil accounts for 90 percent of the state's revenue and is the state's major industry. The state owns the oil resource, which means that decisions about oil taxes have far-reaching budget and economic implications. These decisions should be rationally derived, and politics just don't operate according to the same rules of logic that govern economics. In part, it's because the two realms respond to different currencies -- the one trying to accumulate money and wealth, the other votes and support. As a result, so far as Alaska's oil policy is concerned, the political arena is particularly unsuited to optimizing the tradeoff between incentives, production and revenue.
Here's why. It's about ability, and corruptibility. Given the state's recent history, we should remember that the political system is particularly susceptible to corruption and has to be vigilant in guarding against any repetition of what happened in 2006. Even under the best of times, the political process is characterized by backroom deals, arm-twisting and political tradeoffs. That situation is aggravated because elected officials possess widely varying levels of understanding, interest and focus when it comes time to making decisions about oil revenue.
Under a contract-based system, the Legislature and governor outline general terms and conditions of oil contracts, and institute the checks and balances that are part of responsible oversight. The actual management and negotiation of terms and conditions is vested in professionals who are bound by fiduciary duties and codes of conduct. Professionals, far more than politicians, have greater ability and likelihood to find the sweet spot that makes best use of individual field or project economics, while securing performance commitments from the leaseholders. There's an added bonus because not all oil and gas is created equally, and taxes are one-size fits all. Our state spans a wide spectrum of potential, from heavy oil to natural gas, from the North Slope to Cook Inlet. A contract-based system is flexible and nimble enough to reflect project specific considerations, which minimizes risk, and increases the potential for investment and development.
In addition, contracts are constitutionally protected (Article 1, Section 15 of the Alaska Constitution) -- and hence more stable than taxes. They reflect alignment between the state and leaseholders, and can include "reopener" clauses to address future changed circumstances (including changes in tax policy).
Contracts are widely used in other oil-producing regions around the world. We've even implemented them here, for example under the Stranded Gas Act. Given our experience with entities like the Permanent Fund or the Board of Fisheries, Alaskans should have confidence that we can establish a management system for complex issues (like oil and gas contracts) that vests decision-making ability in experts and professionals tasked with implementing policies.
We can keep going around and 'round about oil taxes, or we can change the polemic and polarity of the debate -- but long-term success requires a different course than the one we're on. Looking to Alaska's history for inspiration, and it's clear that our state's greatest achievements follow a simple recipe -- think big, act boldly, adopt the spirit of innovation, and move Alaska forward. It's a recipe we should embrace now.
Ethan Berkowitz is the former Alaska State House Minority Leader (1998-2006), where he was one of the founders of the Fiscal Policy Caucus. He ran for Governor in 2010, and currently works at Strategies 360.
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch. Alaska Dispatch welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.