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Gov. Parnell vetoes tax decoupling bill Says Senate Bill 305 not necessary, would impose ‘a significant overall tax increase,’ create more uncertainty in fiscal regime Kristen Nelson Petroleum News
Alaska Gov. Sean Parnell has vetoed Senate Bill 305, the bill which would have decoupled oil and gas production taxes.
Sen. Bert Stedman, R-Sitka, co-chair of Senate Finance and the bill’s major proponent, has argued decoupling is necessary to ensure that the relatively low value of natural gas compared to crude oil did not reduce the state’s taxes once a North Slope to market natural gas pipeline goes into operation. The spread between the price of oil and gas relative to the heating value of the two has been wider in recent years than it was historically, that combined with the fact that when North Slope gas sales begin the volume of oil would be less than it is today, would affect the amount of production tax the state receives by reducing progressivity — the factor which adjusts the tax rate upward as the sales price of hydrocarbons rises.
The bill was considered and amended in Senate Finance and passed by the Senate; the House amended the bill in both House Resources and House Finance.
The bill was considered at the end of the session.
The House initially defeated the bill but after Rep. Mike Hawker, co-chair of House Finance and the bill’s sponsor on the House floor, asked the House to rescind its action in defeating the bill it was brought up again and passed the second time. The Senate then concurred with changes the House had made.
Stedman urged passage this session because of the open season under the Alaska Gasline Inducement Act, which commits the state to keep the taxation system in place at the time of the open season for volumes of gas committed in the initial AGIA open season for the first 10 years of North Slope production into a line licensed under AGIA.
Administration opposed The administration opposed SB 305.
Revenue Commissioner Pat Galvin argued in committee hearings in both the House and Senate that there was plenty of time for the state to decouple oil and gas taxes later — and that based on the relative prices for oil and gas used in various scenarios run for the state’s tax situation after major gas sales begin, the state could do better or worse under provisions of the bill.
In explaining his veto, the governor stressed adverse impacts on oil and gas operators and explorers.
“SB 305 effectively would have levied a significant overall tax increase on companies engaged in oil and gas production,” Parnell said in an April 29 statement on his veto. He said his administration had proposed tax credits as an incentive for companies to create “more Alaska jobs in the oil patch,” while the bill would increase taxes and “send us in the wrong direction.” Veto message In his April 29 veto letters to Speaker of the House Mike Chenault and President of the Senate Gary Stevens the governor said the bill “would impose a new, complex and costly tax regime on certain categories of Alaska oil and gas production.”
He called the change “a significant overall tax increase on these operations” and said it would diminish “Alaska investment and job prospects during these globally challenged times.”
The bill also “creates more uncertainties and destabilizes Alaska’s fiscal environment” at a time when open seasons are being held for a gas pipeline project.
He also said the Department of Law had advised him “that this bill is not needed at this time” to protect the state’s ability to get a fair tax rate for its oil and gas “because the Legislature retains broad discretion to change tax laws.”
The governor said that AGIA locks in the production tax obligation at the start of the open season only for gas for which “firm transportation capacity is acquired during the first binding open season. The AGIA tax inducement does not lock in the production tax obligation for oil.”
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