July 24, 2014
Thursday

During legislative deliberations, advocates of the Senate Bill 21 oil tax consistently used North Dakota as an example of the ideal tax regime that Alaska should emulate. We were told that because of North Dakota’s tax structure they are more competitive than Alaska resulting in huge increases in industry investment and rapid increases in production. If Alaska would just lower its tax to be more aligned with North Dakota, we would also benefit from rapid increases in investment and production. However the oil boom in North Dakota, along with Texas, is a result of the advancement of fracking technology that releases hydrocarbons previously trapped in shale rock and the private land ownership of the surface and subsurface. This boom is not tax driven.

In 1830, Massachusetts Supreme Court Justice Samuel Putnam established the Prudent Man Rule, a legal foundation for professional financial management that has been a guiding fiduciary principle in our country for nearly 200 years. Stemming from the case Harvard College v. Amory, Justice Putnam’s Rule states, “All that can be required of a trustee to invest is that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.”

The State of North Dakota levies a combined production and extraction tax of 11.5% on the gross value of oil at the wellhead. In addition, the individual landowner, as the owner of the subsurface resource, negotiates a private royalty payment that averages 20% on the gross value of oil. But in Alaska, the citizens of the state own the subsurface resources collectively and the Alaska State Legislature has the constitutionally mandated fiduciary duty to set a fair sale price for public resources. Referring back to almost 200 years of Judge Putnam’s Prudent Man Rule, I assure you that the prudent North Dakota farmer would never intentionally sell his hydrocarbon resources for less than the going rate, nor should Alaskans as owners of Prudhoe and Kuparuk - the two largest conventional oil fields in North America.

So how does Alaska’s net tax and royalty regimes compare to North Dakota’s gross tax and royalty system assuming the same number of barrels produced? In fiscal year 2013 (the last full year under the ACES oil tax), Alaska’s tax and royalty generated $763 million more than we would have under North Dakota’s tax and private royalty regime. Now that ACES has been replaced with Senate Bill 21, using fiscal year 2015 forecasts (the first full year under the new Senate Bill 21 oil tax), Alaska’s tax and royalty will bring in $1.5 billion less than if we had North Dakota’s tax and royalty. Since the goal of Senate Bill 21 was to make Alaska a more competitive place to invest by lowering our tax rate to something comparable to North Dakota, we missed the mark by $1.5 billion. In addition, North Dakota hasn’t provided fiscal incentives for the oil industry since 2004, whereas the per barrel credit in Senate Bill 21 is projected to average $6 per barrel produced at a cost to Alaskans of $953 million in fiscal year 2015 alone. That equals an effective tax rate of 21.9%, well below the 35% base tax rate that supporters of Senate Bill 21 want you to believe is what the industry pays. Furthermore, the fact that no incremental year after year sustained production increase is expected is a substantial deviation from what the Senate Bill 21 supporters were promised.

The prudent Alaskan man or woman would never accept the terms in Senate Bill 21 in setting the sale price of their subsurface oil. It’s up to you, the owner, to go to the polls on August 19th and tell your government whether or not you believe we’re selling your oil for a fair price. A “no” vote on Proposition 1 will retain the Senate Bill 21 oil tax and a “yes” vote will repeal Senate Bill 21. As for me, I am voting “yes”.

Senator Bert Stedman
Sen.Bert.Stedman@akleg.gov
Sitka, Alaska

Related Viewpoint:

Why I am Voting “Yes” to Repeal S.B. 21 By Bill Walker

Vote Yes. Repeal the Giveaway By Malcolm B. Roberts & Cindy Roberts

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