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Consultant: too-high tax rate easier fix Daniel Johnston tells legislators 20/20 PPT would bring state up to standards of last century; recommends sliding scale tax Kristen Nelson Petroleum News
Alaska has every right to change its tax system, consultant Daniel Johnston told the Legislature’s House and Senate Resources committees March 6. The governor’s proposed petroleum profits tax with a 20 percent tax rate and a 20 percent credit rate brings the state up to the end of the last century, he said.
To capture the high end of oil prices Johnston recommended a sliding scale in addition to the 20 percent rate.
At the lower end he recommended that taxes not be allowed to go lower than what the state would collect with its present severance tax system and the economic limit factor, or ELF.
Johnston said Alaska’s present severance tax system is outmoded and called it more regressive than a typical regressive system. In regressive tax systems government takes a greater percentage at low oil prices and a smaller percentage at high oil prices. The present ELF-driven tax, he said, is tied to production per well and production per field and creates a situation where the interests of the companies are not well aligned with those of the state.
Johnston said he thought that because of the differences in Alaska’s oil provinces — the North Slope with its huge legacy fields and Cook Inlet with its mature fields — it might be impossible to design one severance tax system to fit all cases in the state. Companies want Rolls Royce He said contract stability is a concern to companies everywhere in the world and companies in Alaska are demanding the Rolls Royce of stability.
The state’s areawide leasing program is about as painless as it gets for oil companies, Johnston said, noting that some areas where Alaska looks good in comparison to its competition are difficult to quantify.
As for comparisons with other countries, Johnston said the much quoted 2004 Wood Mackenzie report comparing international competitiveness excludes government participation.
About half of the countries in the world reserve the right to “back in” and take an interest in a development, he said. The companies take the exploration risk, and if there is a commercial find the government has the right to take an interest in the project, typically 30 percent. Government will then be involved in managing the project. Johnston compared it to having your mother-in-law living with you and said it causes the companies considerable financial pain. Diverse circumstances Johnston said he didn’t know if it would be possible to create a system in Alaska that does all things for all people because of the diverse circumstances between the North Slope and Cook Inlet.
The proposed $73 million standard deduction is an attempt to take some pain away from explorers and Cook Inlet, but he said it makes him squirm and he was glad he didn’t have to explain that feature to constituents.
Johnston said he thought the administration’s consultant, petroleum economist Pedro van Meurs, did “damn well with what he had to work with” — the requirement that one system had to fit all of the state’s oil provinces. There are problems with jurisdictions that treat areas differently, he said.
At $40 oil Johnston said he didn’t think Cook Inlet deserves any more pain than they’re already experiencing, and said he would like to see the state have flexibility on an areawide basis. He said there is some economic logic behind the look-back provision which allows companies to deduct for capital investments made over the past five years. Companies made investments under the present system, he said, now the state is making a change and the look back will take some of the pain out of the change.
He said he didn’t think the look back would be an easy sell politically.
The credit plan is a good system, Johnston said, noting that it exists in a number of areas. He agreed with van Meurs that the closest analogue to what’s proposed in Alaska is in Norway. But he said the system was only instituted in Norway a couple of years ago and it’s too early to tell how it will work. Line in the sand “You just have to have a progressive system. ... Everybody is going in that direction and for good reason,” he said.
Johnston said a progressive system is stable and makes future citizens more comfortable.
He said it doesn’t matter what legislators think the price of oil will be, “we should try to design a system that will accommodate a wide range of prices.”
At the low range of prices he said the state should “draw a line in the sand” and never allow taxes to go lower than there are under the present ELF system.
You might, he said, calculate ELF and PPT and “take the higher of the two.”
There are jurisdictions that do that, he said in response to a question from Rep. Norm Rokeberg, R-Anchorage. Some even calculate the tax three ways and take the highest amount.
Johnston recommended adding a sliding scale to the proposed tax, and said in response to a question from House Resources co-Chair Jay Ramras, R-Fairbanks, that the simplest sliding scale, based on oil price, is probably the best.
Both the tax and credit rate could be on a sliding scale, he said. What’s changeable? Johnston said if too high a rate is set, the risk lies with the oil companies.
“If it’s too high and you agree it’s too high, it’s easy to change,” he said. “If it’s too low, you’re going to pay hell trying to change it.”
He characterized the change in tax the state is looking at as in the 5-10 percent range and said he wouldn’t expect much of a response from the companies in terms of investment.
Sen. Fred Dyson, R-Eagle River, asked about the likely outcome for the legacy part of Prudhoe Bay if the tax rate is set too high, and if the companies would quit investing.
“They’re going to make decisions on whether or not economics makes sense,” he said, adding that some projects might be put on the shelf for a while.
Dyson asked if the companies were likely to walk away from the gas negotiations because of rates they considered too high in a new oil tax. Johnston said it would probably impact share price if they did, because probably shareholders are already expecting gas.
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