OPINION: The defense of Alaska’s oil tax law is seriously misleading

The recent defense of the Senate Bill 21 oil tax law offered on these pages by the four co-chairs of the 2014 “No on 1″ campaign was seriously misleading. Ironically, in the claimed effort “to set the record straight and address falsehoods swirling around about Alaska’s oil taxes,” the authors created a big whopper of their own.

The core of their argument is that SB 21 — the oil tax bill passed by the Legislature in 2013 which survived a subsequent referendum in 2014 — is benefiting all Alaska families. As support, they claimed that “more production leads to more oil royalties – which means billions of dollars in direct deposits into the Permanent Fund.”

But that is not the story revealed by reading the Department of Revenue’s (DOR) Spring 2024 Revenue Forecast. Over the 10-year period covered by the forecast, projected production levels do rise by over 35%, from 468 thousand barrels per day (mbd) at the start to 640 mbd at the end. But oil royalties available to pay for unrestricted general fund spending do not; instead, they stay largely static, rising only 1% over the same period.

More to the point — and omitted from their commentary entirely — is the fact that, despite the significant increase in production levels, projected revenues from SB 21 production taxes go down dramatically over the period, plunging by 30%, from $940 million at the start to only $658 million by the end. Driven by that, overall unrestricted petroleum revenues also fall over the period, dropping from $2.43 billion at the beginning to $2.27 billion at the end.

The co-chairs are likely correct that the oil companies and the contractors servicing them will do well over the period. But they are incorrect in implying that extrapolates into the broader economy and all Alaska families.

Instead, one or both of two things will likely happen to make up the hole being left by declining oil revenues: The Legislature will reduce inflation-adjusted spending levels, or it will enact revenue substitutes that largely shift responsibility for the share of spending formerly covered by oil to Alaska families, either through continued and increasingly deeper Permanent Fund dividend cuts or some form of individual taxes.

In short, the overall Alaska economy and most Alaska families will end up paying more — potentially much more — to make up for the oil companies paying less. Put another way, many Alaska families will make less to subsidize the oil companies and their contractors making more.

While that is an understandably acceptable trade-off for the oil companies and their contractors, it should not be for the vast majority of Alaska businesses and families.

To be clear, I also supported SB 21 at the time it was passed and spoke publicly against the 2014 referendum to repeal it for the very same reasons the co-chairs claim spurred them: to create a supportive environment for additional investment in and production of the state’s oil resources.

But we must be honest enough now to recognize and admit that 10 years after its passage, SB 21 is showing some significant design flaws that need to be addressed to remain a fair way of dividing the state’s oil revenues between the industry on the one hand and Alaska families on the other.

I am not talking about and do not support the repeal of SB 21. To this point, it has done a lot of good for Alaska families.

However, as I have talked about elsewhere, I do support making the modifications needed to ensure that both current and future Alaska families share appropriately in the benefits of increased production. I hope many of those elected this cycle - and maybe even the co-chairs - ultimately will also.

Brad Keithley is the managing director of Alaskans for Sustainable Budgets, a project focused on developing and advocating for economically robust and durable state fiscal policies. You can follow the project’s work on its website, at @AK4SB on X (formerly Twitter), on its Facebook page or by subscribing to its weekly podcast and column on Substack.

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