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ISER’s Berman: PPT was better; economist compares tax systems
It’s too bad Alaskans have only two choices in voting on production taxes in the primary election Aug. 19 - rejecting Senate Bill 21, the More Alaska Production Tax, MAPA, in favor of ACES, Alaska’s Clear and Equitable Share - because the tax system which preceded ACES, PPT, the Petroleum Profits Tax, “arguably represents a better fit for Alaska’s production tax regime than either of the two current choices.”
That is the conclusion reached by Matthew Berman, professor of economics at ISER, the University of Alaska Institute of Social and Economic Research, in an August comparison of the state’s historic production tax systems.
PPT had neither the high rates of ACES nor the administrative complexity and inefficient incentives of MAPA, Berman said in “Comparing Alaska’s Oil Production Taxes: Incentives and Assumptions,” available online at www.iser.uaa.alaska.edu/news/?p=861.
He compares revenues that would be generated under the different systems, how the taxes share risk between industry and the state and administrative issues affecting relationships between the state and the oil industry.
Latest political round Berman said Ballot Measure One (the vote on MAPA) is the first opportunity for Alaskans to have a direct say in the state’s oil revenues, but “represents only the latest round of political conversation” on oil taxes which has been going on since Prudhoe Bay oil started to flow through the trans-Alaska oil pipeline in 1977.
Since North Slope oil production began the state has “generally collected between 30 and 40 cents of every dollar of gross wellhead production value,” Berman said, with the state take exceeding 45 percent for “two of the six years under ACES when oil prices were high.” MAPA falls within the 30-40 percent range, but could fall below 30 percent, he said, because of its reduced tax on new oil, which over time will become a larger share of production.
Price, cost assumptions Berman said that an earlier comparison of MAPA and ACES by Scott Goldsmith, professor emeritus of economics at ISER, used figures similar to those which the Alaska Department of Revenue projected for fiscal year 2015. But, Berman said, costs are “much higher for that year than for previous years,” primarily due to capital expenditures for Point Thomson development.
His analysis uses cost assumptions “based on Department of Revenue assumptions for the next five years - which better reflect likely future conditions,” he said. With those assumptions, “ACES would collect $1.3 billion more than MAPA over the next five years - a difference of about 12 percent,” Berman said.
That difference would be greater, he said, but under ACES much of the large capital expenditures for Point Thomson would be eligible for a tax credit, while because of the small production which will come from Point Thomson “the per-barrel production credit under MAPA would be much smaller.”
Capex v. production credits Under ACES there was a tax credit for capital expenditures while under MAPA there is a per-barrel credit for production, which Berman characterizes as eliminating “a risk-sharing mechanism while offering producers an inefficient incentive to increase production.” The incentive is inefficient, he said, since the production credit under MAPA “gives an oil company a less valuable benefit, because the firm doesn’t get the production credit until many years after it incurs the investment expenses.”
While the state shared some of the exploration risk under ACES through credits, that sharing is less valuable to large international companies than to small independents, he said, because larger firms have more diversified portfolios than independents, “leading them to place much less value on sharing risk with the government.”
All the recent tax systems - from PPT through MAPA - are progressive, rather than regressive, so the state gets more revenue when profits are higher, as they have been with high oil prices since PPT was enacted.
With more regressive systems, such as the ELF system which preceded PPT, Berman said, larger companies benefit. “More regressive instruments allow them not only to pay less expected revenue to the state, but also help them compete more aggressively against smaller independent firms,” he said.
Administrative distance Since North Slope production began there has been “a steady decline in administrative distance,” which Berman defines as “the degree to which governments act unilaterally to determine the fiscal regime, versus negotiate terms jointly with industry.”
He attributes this to “significant expertise” which the state has built up over the years in the departments of Revenue, Natural Resources and Law, and the fact that as the state has become more dependent on the industry for public revenues, industry has become dependent on the state for access to resources, a “mutual dependence” which has provided an incentive for cooperation.
Berman also credits establishment by the major North Slope operators of regional headquarters in Anchorage in the 1980s, the thousands of employees they moved to Alaska and their relationships with local contractors, embedding the industry as an integral part of the state economy.
Determination of “new oil” under MAPA places a “significant new administration burden on the Department of Revenue,” Berman said, and how that determination is made, through litigation or negotiation, “could change the nature of the administrative relationship toward either greater or lesser distance.”
- Kristen Nelson
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