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March 2011

Vol. 16, No. 12 Week of March 20, 2011

Parnell: Investment goal of tax change

Governor defends changes in ACES, calls $10 billion loss ‘fantasy scenario’ based on no increased investment, no legislative action

Kristen Nelson

Petroleum News

Making Alaska more competitive for oil and gas investment is the goal of tax changes the administration is pushing in the Legislature. If enacted, the charges are expected to reduce revenues to the state in the initial years, a focal point of concern for legislators opposing the governor’s bill.

The administration projects more investment in the state as a result of lowering the state’s production tax, resulting in more production and revenues in the long term.

Gov. Sean Parnell said at a March 11 press availability that a $10 billion multiyear loss in state revenue cited by one senator is “kind of a fantasy scenario,” which assumes “that no new activity occurs” and that faced with lowered taxes which produce no new activity, the Legislature would take no action for 10 years.

“I don’t assume that. I assume that lower taxes means we’re more competitive and companies come in,” the governor said.

If lowering the state’s oil and gas taxes doesn’t bring in more companies, “you can bet the Legislature will change it,” he said.

An amended version of the governor’s bill passed the House Resources Committee and is in what is projected to be a two-week hearing in the House Finance Committee. Senate Resources is just beginning Senate hearings on the bill, which has a referral to the Senate Finance Committee.

Average at $60 oil prices

Alaska’s current oil and gas tax regime is about average when oil prices are at $60 a barrel, Parnell said, “But when oil prices get up there over 100 bucks a barrel we are a complete outlier.”

“And so what I’m suggesting is that let’s be competitive; … let’s put ourselves in the game instead of taking ourselves out of the game at those high oil prices.”

Parnell said that while he supported the current tax regime, Alaska’s Clear and Equitable Share or ACES, when it was introduced in 2007, compromises were made in the Legislature.

“In hindsight, I think the progressivity curve is too steep,” he said.

Proposed changes this year put a ceiling on progressivity, the rate by which taxes increase as the price of oil drives net revenues up, and add a reduced base rate for new fields.

Progressivity bracketed

Progressivity is also bracketed in the governor’s bill. The bracket proposal for progressivity is like that in U.S. tax rates: A given rate is charged on the first portion of income; higher rates are only paid on portions of higher income.

Under ACES, progressivity affects all taxable income. As the price of oil drives net profits higher, all profits are taxed at the highest rate.

“We are collecting an extreme amount of money compared to other jurisdictions at those high oil prices,” Parnell said.

“There no way that we can be as competitive at these higher prices.”

The state has a world-class resource and unless its tax rate is competitive, the state won’t attract capital to develop that resource, he said.

Parachute going down

The bill breaks out new production — from fields that aren’t currently in units — for a lower base tax rate, 15 percent compared to 25 percent for existing fields, to encourage exploration.

But Parnell also pointed to opportunities in existing fields for production of mid-gravity and heavy oil, which isn’t exploration, but development within existing fields.

“But that is high cost type work that won’t get done with those dollars when those dollars can get a greater return somewhere else.”

“I don’t think we should be holding on and squeezing every last drop out of existing production, because that’s a parachute that’s going down,” he said. Instead the state needs to create new opportunities for future generations.

Parnell said passing the oil tax changes this year is vital.

“Why wait for jobs? Why wait another year for investment? Why wait another year to help fill this pipeline?” he asked.

“There’s no reason to wait and you know we cannot sit here and play political games with Alaska’s future; we’ve got to have a plan forward.”

Uncertain passage

House Majority Leader Alan Austerman, R-Kodiak, said March 14 at the House Majority press availability that it is his impression that there are enough votes in the House to pass the bill.

Whether there would be time for the bill to move through the Senate this session is another issue.

Senate Finance Committee co-Chair Bert Stedman, R-Sitka, has said that there are reports on fiscal issues which won’t be ready until June, well after the end of the session April 17.

Austerman said the Legislature probably wouldn’t call itself back into session — a situation in which all issues are on the table — but would wait for the governor to call a special session and set the agenda.

He said that if the ACES revision passes the House and the Senate is just a few days from completion, “it could happen that we extend the session.” But if the reports are needed or if the bill is bogged down in the Senate, Austerman said, a special session later in the summer makes sense.

He said preliminary discussions indicate a preference for waiting until after the reports are in, or just before they are due so that the Legislature would be in session when they come out.






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