May 07, 2019
Tuesday PM

I want to thank Mary Lynn Dahl for her thoughtful letter that ran in the April 29 edition of Sitnews. Alaska’s oil and gas tax system is an important issue that needs to be considered as we work towards a long-term fiscal solution. Mary makes important points and raises issues that have not had much public discussion. I’d like to clarify a few things about our tax system as it stands now, how we’ve been able to fix parts of it in recent years, and the work that remains to be done.

Much of her concern has to do with funds that have been collected by the Pipeline owners for the future Dismantlement, Removal, and Restoration of the pipeline property. It is important to recognize that pipeline tariffs have been extensively litigated for decades. The state has won or settled many of these suits, and the resulting billions in back taxes and royalties are what built up the Constitutional Budget Reserve Fund we’ve relied on to balance the budget in years when oil revenue was low.

Most of the pipeline tariff covers maintenance, operations, and property taxes. Only a small portion goes to dismantlement. It is true that the funds aren’t held separately- which I believe they should be- and the owners have probably collected more than is needed, but this is not the biggest problem in our system.

Alaska is the only state in the US that taxes oil based on net profits, yet we are also the state that relies the most on oil revenues for government services. We are doubly fortunate because most of our oil has been produced from state owned lands, which means we collect the landowner’s royalty in addition to the production tax. The latest analysis from the Department of Revenue, which has been confirmed in testimony from producers, is that the state currently gets a bit over 40% of profits, the federal government a bit over 10%, and the producers close to 50%.

When SB21 passed in 2013, the stated desire was for a system where “government take” was about 65% of profits (with the previous tax system, it had been over 70%). Things went sideways when prices dropped, companies were able to dramatically cut their costs, and the $8 per barrel credit started offsetting a large portion of our tax. Currently that credit reduces our effective tax rate down to only 8%. Also, the federal corporate income tax cut from 35% to 21%, which took effect in 2018, left a lot of money on the table.

Over the past three years, we’ve eliminated the unaffordable system of issuing tax credits that could be exchanged for state cash. We’ve eliminated the subsidies of Cook Inlet oil and gas, which barely pays production tax at all. And we’ve fixed the problem where “new” oil pays a dramatically lower tax rate forever; now that production reverts to paying the full tax after a few years. But the basic pieces of the tax itself have not been changed, and it’s probably time to look at this again.

However, it’s too aggressive to expect the oil companies to only keep 1/3 of the gross value of the oil. Whether the tax system is based on gross or net, the companies are the ones paying all the costs of developing and producing the oil. As our fields get older, it gets more expensive to find and produce the remaining resources. I’m not sure if there truly is as much as $1.3 billion that is undertaxed, at least not at recent prices. I suspect the reasonable amount is about half that, but at $100 per barrel, the oil industry could probably afford to pay another billion or more.

The easiest way to approach this issue is to reduce that per-barrel credit. My caucus passed a bill in 2017 that would have eliminated the credit and reduced the base tax rate; had it become law we’d be collecting close to another $700 million per year, which I believewould be more than enough to pay a fair dividend without having to harm our schools, health care, and ferries. I hopethat next year we’ll be able to have a more comprehensive conversation about how we can truly build a sustainable budget model for Alaska.

Once again, thank you Mary for bringing this issue to the forefront, and thank you also to the other constituents who have reached out to my office about oil and gas taxation policy. Don’t hesitate to call me at 907-247-4672 or email me at Rep.Dan.Ortiz@AKLeg.gov.

Respectfully,

Rep. Dan Ortiz
Ketchikan, Alaska

Related Viewpoint:

Oil & Gas Tax Reform By Mary Lynne Dahl

Editor's Note:

The text of this letter was NOT edited by the SitNews Editor.

Received May 06, 2019 - Published May 07, 2019

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