New oil tax does not make deadline
A bill to rewrite Alaska’s production tax system ended at midnight May 9, victim of a perfect storm: the imminent release of the gas line fiscal contract; politics; the complexity of issues involved; and the mandatory end of the regular session of the Alaska Legislature.
Committees in both House and Senate spent countless hours taking testimony from the administration, their own and the administration’s consultants, the state’s oil and gas producers and explorers and the public. Resources and Finance committees in both the House and Senate wrote, and amended, committee substitutes for the administration bill, and both House and Senate passed the bill, but not the same version.
The House voted shortly after 3:30 a.m. May 9, the last day of the session, passing a committee substitute for the bill the Senate passed April 25. But there were too many changes for the Senate — and no time for a conference committee to work out the differences.
So the PPT, needed to complete the draft gas line fiscal contract that was released for public comment May 10, is expected to become another special session order of business for the Legislature — which started what is expected to be only its first special session May 10.
Political landminesWhen Gov. Frank Murkowski addressed the Legislature on the first day of the special session he said political dynamics are the reason legislative bodies rarely have the chance to change tax law. The transfer of wealth is fraught with political landmines, the governor said, noting that the last change, a relatively modest adjustment of the economic limit factor, occurred in 1989 in the aftermath of the Exxon Valdez oil spill.
Murkowski said his aggregation of North Slope satellites last year, a $200 million tax increase, was “not very popular.”
The reason this administration and this Legislature have the opportunity to make major changes in the oil tax is because of the gas line, he said: with development of a gas line a tax change can take place.
“We all know after last night we have to revisit the PPT,” the governor said, telling legislators that the state is losing money every day under the existing production tax system.
Work began in FebruaryThe Alaska Legislature began working on the administration’s proposed rewrite of the state’s oil and gas production tax, the production profits tax or PPT on Feb. 22. The bill had referrals to Resources and Finance committees in both houses.
The Senate was the first to pass the measure, and House Finance reworked that bill, returning to the governor’s proposed 20 percent tax rate and 20 percent credit, but including the progressivity factor which has been in all the committee substitutes.
The House Finance progressivity surcharge was based, like a Senate Finances draft, but not the final version the Senate passed, on the net, automatically including increases in the cost of production in the calculation.
Debate on the House floor began Sunday, May 7, and continued Monday evening May 8, running overnight into May 9, the last day of the session, before tying up shortly after 3:30 a.m. with a 29-10 vote to move the bill.
The tax rate was raised to 21.5 on the House floor, but attempts failed to raise the trigger point for the progressivity surcharge, which House Finance set at a North Slope netback of $35.
Senate floor debate began on the bill around 7 p.m. May 9, just five hours before the midnight end of session, with debate 4 to 1 against the bill. The vote was 10-10, defeating adoption. Senate leadership tried again shortly before 11 p.m., but could only get nine votes to rescind the previous vote. The PPT was not brought up again when the Senate returned just before midnight to vote on the capital budget.
House debate lengthyThe House floor debate May 7-9 was wide-ranging, and started with an amendment by Rep. Harry Crawford, D-Anchorage, to dump the profits-based tax in favor of a revision of the existing severance tax on the gross, an amendment which was defeated 28-12.
Anchorage Democratic Reps. Ethan Berkowitz, the House minority leader, and Eric Croft, both candidates for governor, led the charge against the PPT, concluding with a proposal early in the morning May 9 that a vote on PPT be delayed until the gas fiscal contract was public.
Current high oil prices have frequently been the basis of discussion in committees, with legislators pushing progressivity options to increase government share at high oil prices, but on the House floor there was a lot of concern expressed by members of both parties about what would happen under PPT if oil prices returned to a range of prices in the $20s, normal before the recent price run-up.
There was a proposal, which was defeated, to insert a floor in the PPT to protect the state at low oil prices. Administration and legislative consultants have said all along that when you replace a regressive system with a progressive system the proportion of the government’s take increases at high prices but may drop to zero at low oil prices: if the companies have no profit, there is no profit to tax, although the administration testified that one good year would make up for several bad years.
Senate: 25 percent?Two Republican senators who voted against the House bill, Gary Wilken of Fairbanks and Tom Wagoner of Kenai, both said they wanted to see a 25 percent tax. The version the Senate voted out on April 25 included a 22.5 percent tax.
Wilken said he was aligning himself with the consultants who said a 25 percent tax rate wouldn’t deter investment in Alaska.
He said the Department of Revenue identified 15 changes the House made in the Senate’s bill, and complained that the version the House voted on was cobbled together in the middle of the night, questioning whether the Senate even knew what was in the bill.
Sen. Hollis French, D-Anchorage, had earlier criticized the way the House handled amendments on the floor and said he wouldn’t make an oil tax decision until he’d seen the gas contract. French earlier sued the administration to get release of the gas contract.
Wagoner, like Wilken, objected to the advertising campaign around the PPT, and said he wished there was time to take the bill to a conference committee and work out differences between the House and Senate. He said he thought the tax change was needed, but couldn’t vote for the bill until there was more work done on it.
Sen. Bert Stedman, R-Sitka, who worked on the bill in both Senate Resources and Senate Finance, was the only senator to speak in favor of the bill, noting that while the House tax rate was lower at 21.5 percent, with the House version of progressivity the state would do better at oil prices above $40 than under the Senate version, and as prices advance the state is “substantially better off” under the House version.
Stedman also spoke in favor of a progressivity surcharge on the net, which takes into account the cost of extraction. The cost of extraction will go up over time, he said, and it’s important that the tax structure take that into account if it is going to stand up over time.