Last year the Alaska Legislature made a controversial change in the oil production tax, the state’s largest source of oil revenue. The old tax, known as ACES (Alaska’s Clear and Equitable Share), was replaced with MAPA (More Alaska Production Act, or SB21). How much money the production tax brings in is a big issue: oil revenues pay for most state government services, and the industry accounts for roughly half of all Alaska jobs stated Goldsmith in his study.

Quoting Goldsmith's study, supporters say the new tax will stimulate North Slope oil investment, leading to more oil production - and so to higher oil revenues and new jobs. Critics say the oil industry doesn’t base investment decisions on tax structure, and that the revised tax is a give-away to the industry. They cite as evidence the $2.1 billion drop in the Alaska Department of Revenue’s forecast of expected 2014 oil revenues after the new law was passed.

Alaskans face a choice between the old and the new tax structures this August, when a referendum on the primary election ballot will ask them whether to keep or repeal the new structure. Goldsmith said his paper is intended to help Alaskans understand the two systems, which have the same tax base but differ in their tax rates, credits, and treatment of certain new production.

According to Goldsmith's paper:

• About 4% of the $2.1 billion drop in the fall oil revenue forecast for 2014 is due to the new tax. Most of the decline can be traced to lower price and production assumptions—as well as higher cost assumptions—in the forecast, and the effects of those changes on the tax rate. The rest of the decline is a one-time drop, with oil producers claiming credits expiring with the old tax.

• Future revenues are very sensitive to oil prices and costs of production and are difficult to forecast. If current trends continue—if costs continue to rise
faster than oil prices—the new tax could produce more revenue. But if conditions revert to those of past years, when production costs were lower, relative to oil prices, the old tax could produce more revenue. Among the factors contributing to rising production costs in recent years have been inflation in the price of inputs, maintenance of aging facilities, and development of marginal fields.

• The tax change, combined with a modest increase in new production, would produce higher revenues under a reasonable range of assumptions about oil prices and production costs. New investment would drive up tax deductible costs in the short run—reducing production taxes—but that loss would be more than offset in later years by additional production tax and royalty revenues from new production, even at a lower average tax rate.

• Investments that draw new outside money into the oil patch could create long-lasting jobs and increase consumer purchasing power. For example, $4 billion in new spending in the oil patch could add an average of 5,000 public and private sector jobs per year over 20 years, with more than $300 million of additional wages and salaries annually.

When the new oil production tax known as SB21 or MAPA (More Alaska Production Act) was passed by the legislature last year replacing ACES (Alaska’s Clear and Equitable Share), the Alaska Department of Revenue forecast the change would cost Alaska $700 million in lost revenue in its first year (FY 2014) and as much as $4 billion over the next 5 years, assuming no incremental production stimulated by the new taxviii . Opponents of the tax viewed this as evidence of a massive “give away” to the oil producers stated Goldsmith in his paper. This fear seemed validated when a few months later the Alaska Department of Revenue issued their annual 10 year oil revenue report (Revenue Sources Book, Fall 2013) showing a $2.142 billion drop in FY 2014 revenue compared to the previous year forecast before MAPA was passed.

However, stated Goldsmith in his paper, only about $88 million (4%) of the drop in forecasted FY 2014 revenue was due to replacing ACES with MAPA. $463 million was due to lower forecasts of royalty and income tax revenue. These reductions, which obviously had nothing to do with the change in the production tax, resulted from downward revisions in assumptions about price and production and an upward revision in assumptions about cost. Under these same new assumptions revenues from ACES (with no change in the tax law) would have fallen by $1.290 billion. However, the reported drop in ACES was $1.690 because of the inclusion of a one-time $301 million payoff by the state to cash out expiring ACES credits. After accounting for all these changes, only about $88 million of the drop is attributable to the shift from ACES to MAPA.

According to Goldsmith, the “fictitious $2.1 billion giveaway” does not exist. 96-percent of the state’s revenue change is due to decreased production and lower price of oil; only 4-percent of our recent revenue forecast decrease was due to the shift from ACES to SB 21 provisions. And, Senator Cathy Giessel (R), Chair of Alaska Senate Resources, points out that this is just a forecast. “The actual production numbers will not be final until after July 1, when the State fiscal year ends. We already know that production has increased in just the last few months,” said Alaska Senator Giessel.

“Both ACES and SB 21 are net profit based, giving tax credits to producers, and in that regard they are the same. However, many differences were cited in the presentation that clearly point to the provisions of SB 21 being notably advantageous for Alaska” said Senator Giessel.

Article VIII of the Constitution mandates there be a maximum benefit for Alaskans, but Goldsmith points out that this is not just in public dollars, but in development that fosters a healthy private sector, job creation and an overall vibrant economy. Goldsmith demonstrated that more revenues will be realized under SB 21 with only modest investment by the North Slope producers. Goldsmith noted important differences in SB 21 from ACES: there is a new oil credit under SB 21, and lower tax rates. SB 21 set the base tax at 35-percent and also gives credits on production of oil. SB 21 tax structure will result in increased revenue for the State when oil prices are low.

Quoting a news release from Sen. Glessel, there are hurdles for new oil production. Goldsmith’s study revealed that capital costs increases have been over 200-percent. There is so much water coming out of wells now that they basically are water wells with oil as the byproduct. Previously there had been 2:1 ratio of water to oil. Now it is 4:1, which increases the cost to produce the oil. And then there are the labor costs which have tripled since 1980 when oil first made its way down the pipeline.

The biggest difference between SB 21 and ACES is the drop in revenue under ACES during development due to generous tax credits that were not linked to oil production, Goldsmith pointed out. He noted that new money in the oil patch is represents more private sector money in the economy outside of state spending dollars. But more importantly, the job forecast and payroll dollars under SB 21 versus ACES is higher.

“Under most of the conditions reviewed in his study, the shift from ACES to SB 21 with its new investments brings new revenue. But even more significant is the number of jobs created. More invested money is more jobs! If oil prices remain the same or even if they rise, SB 21 still creates more revenue than ACES. There is $4 billion in new investment coming under SB 21 and Dr. Goldsmith's study demonstrated a clear increase in State royalties,” said Senator Giessel.

Tax incentives do make a difference. SB 21 gives those tax reductions on produced oil. Goldsmith pointed to Cook Inlet as evidence of lower taxes stimulating production. Cook Inlet is seeing a dramatic uptick in production and a flurry of economic activity.

"The increased investment by companies on the North Slope is a critical part of an in-state gas pipeline," Senator Giessel said. "Dan Fauske, Alaska Gasline Development Corporation Executive Director, points out that the staff and equipment on the North Slope, working to produce oil, will be the support for natural gas development for Alaska. SB 21 is the foundation for a gas pipeline."

Vic Fischer, Chair of "Repeal the Oil Giveaway", stated in a news release that Goldsmith's scenarios grossly understate the amount Alaskans stand to lose under Alaska’s new oil tax structure, which many Alaskans call the “Oil Wealth Giveaway.”

Fischer, Director Emeritus, Institute of Social and Economic Research, UAA, stated the legislature took that amount of money from the savings generated by the previous tax regime, ACES (Alaska’s Clear and Equitable Share). At that rate, the $16 billion savings account will be depleted in eight years or less.

In contrast to Goldsmith’s rosy scenario comparing the ACES and SB21/MAPA tax regimes on a make- believe investment, the reality of Alaska’s oil future as projected by the Parnell administration is dismal, said Fischer.

The state’s 2014 Revenue Forecast projects that North Slope oil production will decline 40 percent over the next decade, from the current 521,000 barrels per day to 315,200 in 2023 under the new tax regime. That’s a scary reality that can’t be dismissed by scenario making, said Fischer.

According to Fisher, Alaska’s oil history demonstrates that tax reduction did not increase production. Under the ELF tax re- gime, which preceded ACES, tax rates on Kuparuk and other fields were virtually down to zero. But that had no effect whatsoever to increase the amount of oil produced.

Changing the tax law has not had the desired result of increasing net production in the past. Today, MAPA simply provides a bonus of reduced payments for oil that will be produced anyway from Prudhoe Bay fields. Fischer stated that is a pure giveaway of the state’s wealth.

According to Fischer, what Alaska needs is a tax structure that increases exploration for new sources of oil and gas, not just pro- vide incentives to pump the oil they are contractually obligated to produce.

Only by voting YES to repeal SB21 and then rewriting the tax structure will Alaska beget the type of oil development that benefits Alaskans as well as the shareholders of oil corporations said Fisher.

The report is available on ISER’s website and Glessel is encouraging everyone to take the time to review it. "This data is sound and from a reputable source; it’s good news for Alaska’s economy and for a vibrant future” said Senator Giessel.

On the Web:

Alaska’s Oil Production Tax: Comparing the Old and the New (pdf 42 pages)
By Scott Goldsmith, May 2014
INSTITUTE OF SOCIAL AND ECONOMIC RESEARCH

Sources of News: 

Scott Goldsmith,
University of Alaska Anchorage’s Institute of Social and Economic Research (ISER) Economist
http://iser.uaa.alaska.edu

Senator Cathy Giessel, (Republican)
Chair of Alaska Senate Resources

Vic Fischer, Chair of "Repeal the Oil Giveaway"
Director Emeritus, Institute of Social and Economic Research, UAA

 

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