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State says new tax is fiscal neutral At anticipated oil prices both ACES and MAPA tax system would raise similar revenues; other factors caused revenue forecast to drop Alan Bailey Petroleum Newss
With opponents of the State of Alaska’s new oil production tax characterizing the tax change as a $2 billion giveaway, the debate over the tax is heating up ahead of an August referendum on whether the tax change should be repealed. But the state remains adamant that, far from being a giveaway, the change is essential to the encouragement of new investment in the Alaska oil industry and, hence, to the industry’s health.
The change involves replacing the previous tax system, known as ACES, by new tax rules under the More Alaska Production Act, or MAPA, sometimes also referred to as Senate Bill 21.
The state’s latest revenue forecast for fiscal year 2014 shows a revenue decline bearing an uncanny resemblance to that $2 billion figure, although the new tax law only comes into effect for part of that year. But at prevailing oil prices the new tax has almost no revenue impact, Bruce Tangeman, deputy commissioner of the Alaska Department of Revenue, told the Commonwealth North Energy Action Coalition on Nov. 17.
Lower prices, higher expenditure The biggest single factor, by far, in the reduced revenue estimate is a lower expectation for oil prices, based on current price trends, Tangeman explained.
“That’s what we saw was happening,” Tangeman said. “The prices were flattening and going down a bit.”
The second biggest factor in the reduced revenue forecast is a growth in the expected oil industry expenditures on the North Slope, expenditures which are deductible from a company’s taxable income. These expenditures, which in part reflect new announcements about oil-field activities, including the bringing of additional drilling rigs to the Slope, will be beneficial for oil industry jobs and oil production — the goal is to put money into the private sector for hiring people, rather than into the state’s coffers, Tangeman said.
Lower production Next comes a reduction in the estimate for the amount of oil likely to be produced — less oil translates to less state revenue. The reduction in the oil production forecast results from the state trying to take a more conservative and hence a more realistic view of future production, with assumptions that not all possible future oil development will take place as planned — past state production predictions have tended to be over optimistic and have been wildly inaccurate, Tangeman said.
In future the state expects its production forecasts to be closer to reality than they have been in the past 20 years, he said. And the production figures used in the new revenue forecast do not reflect any possible production uptick that might result from the new tax regime, he said, adding that the state is going to take a closer look at the production forecast when it prepares its spring revenue forecast.
“While we’re showing a more conservative line, we’re also recognizing there’s a tremendous upside,” Tangeman said. “But when legislators and the executive branch sit down and look at what they have to budget with, we think it’s important for them to have a more conservative and realistic goal.”
Other items Another chunk of the revenue drop comes from an accelerated closeout of some tax credits left over from the ACES system. Royalties, property tax and corporate income tax are also expected to drop.
That leaves a small anticipated production tax drop in financial year 2014 as a consequence of the new tax law and a tax rise of about $50 million in 2015 as a result of the tax change, Tangeman said.
And estimates of likely annual state revenues under ACES and MAPA for financial years 2014 to 2017, using oil prices in the range $105.86 per barrel in 2014 to $110.38 in 2017, shows almost no difference between the likely revenues emanating from the two tax systems.
“$2 billion — it’s not even part of the equation,” Tangeman said.
Progressivity The key differences between the two taxes are the base tax rates and the progressivity, the way in which tax rates rise with rising oil prices. ACES has a base rate of 25 percent of net income, which applies at relatively low oil prices, but with rates becoming progressively higher at higher prices. MAPA, on the other hand, has a fixed base rate of 35 percent at all price levels, albeit with a lower rate that would apply to some newly developed oil.
Thus, at low oil prices the tax take from ACES, at 25 percent, would be lower than the take from MAPA, at 35 percent. At high oil prices, as progressivity kicks in, the rate for ACES would become higher than that for MAPA. The cutover point, at which the ACES tax take starts to exceed that of MAPA, occurs at an oil price of around $105, Tangeman explained.
ACES disappointment Tangeman said that a sharp decline in oil production, rather than a predicted trend towards flattening, after ACES went into effect, had been a motivation for the state to change the tax system. And that higher than expected decline came despite the fact that oil prices that had increased substantially, rather following a predicted somewhat level trajectory. The unexpected oil price increase should have triggered a boost to production, not an accelerated decline, Tangeman said.
And Tangeman explained that one problem that the state had identified with the ACES system was the way in which the tax progressivity — the change in tax rate with the oil price — caused major fluctuations in the effective tax rate from one month to the next, as the oil price fluctuated. Short term fluctuations in the effective tax rate make it very difficult for oil companies to plan investments, he said. For example, in 2009, a year for which the state has verified tax records and a year with big oil price swings, the effective tax rate varied between 50 percent in July and 15 percent in December, he said.
Under the new system the tax rate is completely predictable, Tangeman said.
“That’s one of the biggest changes that we’re seeing,” he said.
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