OPINION: Analysis of the oil tax bill is missing

A key provision of Senate Bill 114 would raise the oil production (severance) tax by reducing the per-barrel credit (PBC) by $3 per barrel. The administration calculates this would increase taxes $2.5 billion over the next 10 years, but the amount “does not include any changes in company behavior as a result of this proposal.” This is like Ford increasing the price of pickups by $15,000 and thinking it will sell the same number of trucks.

There has been no analysis as to how this would affect investment. Bill sponsors argue that Prudhoe Bay’s PBCs don’t correlate with investment there, but one’s field’s profits often are invested in another’s. You cannot simply extract that much money from investors and expect no reaction.

The credit is not a luxury where you can simply pluck out a few dollars without understanding how it operates within the larger structure of the fiscal system. The PBC does not operate as a credit. It operates as a progressivity mechanism. Initially there is a 35% tax on net income. A 35% rate and no credit (coupled with the royalty, as well as property and state and federal income taxes) would be economically unviable at lower prices.

So, at lower prices there is a higher PBC, and at higher prices there is a lower PBC. It makes the effective tax rate increase as prices increase. This way it keeps the government’s share of pre-tax profits (“government take”) in line with national and international norms across a broad spectrum of prices.

The same result could have been achieved with progressive tax tables like IRS has for our personal income taxes; the PBC is no more a credit than having a tax rate of less than 100% is.

There are economic approaches to assess the impact on investment. Government take provides a systematic way to look at what goes on in the rest of the world as a gauge for the reasonableness of the tax system. This is what many economists would consider “fair share.”

As measured by government take, which includes all state and federal taxes and royalties, Alaska producers currently pay more than most Lower 48 oil states. With the reduction of the PBC under SB 114, it would be considerably more. At current prices the bill is a 40% tax increase.

Producers have plenty of opportunities outside Alaska, with lower production costs and taxes, and will easily invest elsewhere. Jobs will follow.

Between 2007-2013, the state had an oil tax system called “ACES” that was very uncompetitive. It produced marginal tax rates that exceeded 90%. Producers could make much more everywhere else. As a result, even though oil prices in that period exceeded $100 per barrel, and investment was booming worldwide, in Alaska, North Slope production dropped 300,000 barrels per day in that six-year period, and was forecasted to drop another 200,000 after that. The state was going to make less money with the higher tax rate.

Since ACES was replaced with the current system, including the PBC, production has not declined. The state last year made $1.8 billion from the production tax alone.

And two giant oil fields, Willow and Pikka, both deferred by ACES, are hopefully going to start up soon, adding another 300,000 barrels per day — if we don’t shatter the investment climate.

Regarding the existing fields, with the numerous tax changes over time, Alaska has one of the most unstable oil and gas fiscal systems in the world. However, after ACES, the state does not have another opportunity to play “bait and switch” with the producers, enticing them with one tax rate and then jacking it up once the fields are operating. This is one reason a North Slope natural gas pipeline was never built.

Roger Marks is an economist in private practice in Anchorage. From 1983-2008, he was an economist with the State of Alaska Department of Revenue Tax Division.

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