Ballot Measure 1 is a bad bet for Alaska

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Alaska is in a tough spot when it comes to its budget. That’s the driving force behind Ballot Measure 1, an initiative that seeks to raise oil production taxes on three of Alaska’s biggest oilfields. There’s plenty of detail in the initiative, argued at length by its backers and opponents, about what precisely it would do — the exact percentage that taxes would increase, what constitutes fair value for Alaska’s oil, how much money the tax hike would generate. But the bottom line is this: It would be a major tax increase on Alaska’s biggest oilfields, generating somewhere between a few hundred million dollars and several hundred million dollars, depending on the price of oil. It represents a massive transfer of funds from the private sector to state coffers. The question Alaskans should ask in deciding how they’ll vote: Is that transfer worth it?

It’s a bad bet. Here’s why.

Going after Big Oil to partially cover Alaska’s massive budget shortfall is a natural impulse: It’s one of the only sources of funds that doesn’t stick most Alaskans with the bill personally — at least not directly. But make no mistake, there would be impacts to all Alaskans. Big tax hikes at Prudhoe Bay, Kuparuk and Alpine would make the fields less profitable for operators, which would make producers less inclined to invest further resources there when weighing them against other fields around the world. That’s a big deal, because Prudhoe and other aging fields are at a point where they could benefit substantially from more investment. Advances in lateral and diagonal drilling, as well as mapping and other technology, have enabled producers to extend the lives of these older fields — providing it makes economic sense. No one outside of the oil companies themselves can say with authority where the tipping point would be in terms of the decision to make investments to prolong the operating lives of fields taxed by Ballot Measure 1, but it’s certain the tax increases would weigh heavily on the negative side of the scale, at a time when Alaska is sorely in need of the economic boost oil production provides. Over the long term, one immutable law of nature is that you get the behavior you incentivize - and increasing the cost of doing business in Alaska would provide a clear and strong incentive for the producers to invest elsewhere. That leads to fewer jobs, less opportunity for Alaskans and a shrinking economy.

This is far from Alaska’s first trip on the oil tax reform merry-go-round. The current tax regime, colloquially known as SB 21 after the bill that established it, went into effect in 2013, after the oil industry successfully made the case that the prior system, known as ACES, was squeezing the state’s golden goose too tight and causing producers to curtail production and exploration in Alaska. Unfortunately for Alaskans, the passage of SB 21 was followed in short order by a massive, protracted oil price slump. That slump, coupled with generous exploration credits that are now expired but for which the state is still on the hook, caused a dramatic decline in Alaska’s overall take from the oil industry.

And although SB 21 has flattened the decline in production on the North Slope substantially, it hasn’t matched the most bullish projections of its boosters when it was being argued in the Legislature — a fact the backers of Ballot Measure 1 use as a cudgel to convince Alaskans that it’s not working. But even if one accepts the premise that SB 21 hasn’t lived up to the lofty production goals of its promoters, how is making North Slope production less economic with Ballot Measure 1 going to help? It stands to reason that it will in fact hurt production — over time, it may hurt production a great deal.

Our state is in a severe budget crisis, and we need to find a way out. But Ballot Measure 1 would help our short-term budget picture at the expense of the longer term, once again squeezing that golden goose harder to try and get out a few more eggs — a tactic that has been tried and failed.

What makes the gravity of our situation harder to communicate to Alaskans is that we’ve been here before, with low oil revenue threatening to torpedo the state’s budget. But each time, we were bailed out by the “oil price fairy” — the return of high prices before we’d burned through our savings and had to make hard choices about cuts, taxes or reducing the Permanent Fund dividend. That won’t happen this time, even if oil prices increase substantially. The North Slope’s oil output has decreased enough that we can no longer put all of our eggs in one proverbial basket where revenue is concerned.

There is also this: Even if you disdain Alaska’s oil industry and truly believe that Alaska has not been given its “fair share,” the reality of this precarious moment in time is that our state’s economy may simply be too fragile to survive this sort of financial trauma. Continued spending of budget reserves, political gridlock and a pandemic-induced recession have pushed the economy to the edge, and we can’t risk pushing it any further. In that spirit, if Ballot Measure 1 is defeated, producers should come to the table and help hammer out a fair solution that doesn’t kneecap investment on the North Slope, but which also helps provide services essential to Alaskans. If they don’t, it seems a virtual certainty that they’ll have to beat back more punitive tax initiatives every two years until frustration bubbles over and one passes — at which point all of the time and money the companies spent stiff-arming any changes to oil taxes will be wasted.

Alaskans should vote down Ballot Measure 1 — but they should expect their legislators to make moderate oil tax reform a part of the next legislative session’s budget solution. And the oil producers should take part in that process, as a solution reached with all parties at the table will stand a far better chance of being a stable oil tax solution, rather than the flavor of the session that will inevitably be the target of another initiative in the next election cycle.

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