EDITORIAL: Hilcorp’s $100 million warning shot to Alaskans

For a brief, shining moment, it appeared the Alaska Legislature might have the gumption to even the playing field for oil companies in Alaska by eradicating a loophole that Hilcorp has exploited to save itself $100 million per year in taxes.

Then, predictably, legislators folded like a dollar-store tent in gale-force winds.

It’s worth examining how we got here. A week ago, Sen. Bill Wielechowski amended a carbon-storage bill, HB 50, to eradicate a loophole from Alaska’s tax code that lets S-corporations like Hilcorp off the hook for state corporate income taxes. It’s no small thing; Hilcorp’s portion of the income tax it would have to pay, if it were subject to taxes that apply to other major companies such as ConocoPhillips, would cover more than half of the proposed increase in school funding this year. Put another way, the taxes Hilcorp avoided paying this year could have funded an increase of nearly $400 to the Base Student Allocation school funding formula.

Hilcorp’s response to the potential end of its free ride was predictable but shameful. Hilcorp Alaska senior vice president Luke Saugier, in an email to Railbelt electric utilities and Enstar, said that making the company pay corporate income taxes would cause Hilcorp to consider walking away from natural gas production in Cook Inlet — a more or less explicit threat to the heat and power of the vast majority of the state’s residents. His letter was tantamount to saying: If you tax us, we’ll turn off the gas to Alaska.

“Due to this new tax’s vague and uncertain language, as well as the provision not being sufficiently modeled, we are unsure what the impact will be on our ability to meet your gas supply needs as we will need to re-examine the investment we had planned for Cook Inlet,” Saugier wrote. “Unfortunately, it will also negatively impact our ongoing negotiations related to gas storage options, jack-up rig availability, new gas supply contracts, and could harm our ability to meet existing interruptible contracts.”

To their credit, legislators saw this email for what it was. Wielechowski — the legislator with the stiffest spine on this issue — called it “an absolutely abusive, horrendous form of intimidation, and hostage-taking,” while Republican Sen. Cathy Giessel summarized Hilcorp’s message as, “You either keep us tax-free, or we will simply stop producing gas in Cook Inlet that supplies more than 75% of the population with energy.”

Unfortunately, recognizing the threat didn’t galvanize the Legislature to stand up to Hilcorp’s bullying tactics. A few days ago, senators rolled over and stripped the tax amendment out of the bill after Gov. Mike Dunleavy and the House majority caucus made it clear they didn’t have the guts to stand up to Hilcorp. It’s inexcusable for our elected representatives to abandon their constitutional mandate to develop Alaska’s resources for the maximum benefit of the state’s people — and, worse, to actively take the side of the company looking to benefit from our busted tax code.

Let’s remember why Hilcorp is exempt from paying the same taxes other oil companies pay: It’s simply because of their corporate structure. Because they happen to be an S-corporation, rather than a C-corporation like ConocoPhillips or BP, they aren’t included in the Alaska corporate income tax. It has nothing to do with a policy decision or because they offer some other benefit to the state. It’s purely a technical loophole. If Hilcorp has a valid policy-based reason for S-corps being exempt from income taxes, they should make that argument to Alaskans, rather than holding us hostage with threats and innuendos.

This shouldn’t be read as an anti-development or anti-oil argument, nor is it a call to raise taxes; on the contrary, it’s a call for existing taxes to be fairly applied. It’s clear that although our most lucrative days of oil and gas development are in the rearview mirror, the state should continue to encourage the development of its energy resources for jobs and revenue. There could also be a case to be made that corporate taxes in Alaska are overly onerous, but there is no justification for one company to be able to skirt paying while others abide by it. Believing that Hilcorp needs these kinds of uneven incentives to operate profitably in Alaska is either naive, fatuous or both. The fact that Cook Inlet is a high-cost environment shouldn’t be a cause to exempt the company from income taxes, as presumably the bulk of its profits come from Prudhoe Bay, not Cook Inlet.

Worst of all, legislators’ near-immediate retreat from establishing corporate income tax fairness (and Gov. Dunleavy’s inexplicable opposition to leveling the playing field) sent exactly the message that Hilcorp wanted to hear: Threaten us and you’ll get what you want. Now that the company’s leadership knows the threat of turning off the natural gas spigot in Cook Inlet is so effective, what concession will it extract from state lawmakers next?