Borough wants proof gas line needs tax relief

Fairbanks Borough mayor says he will work against a state contract with a developer that contains property tax deferrals

Larry Persily

Petroleum News Government Affairs Editor

The Fairbanks North Star Borough is not interested in accepting a deferral of any property tax revenues from a proposed Alaska natural gas pipeline unless it is convinced such action is needed to make the project economically viable.

Unless he sees such proof, Borough Mayor Jim Whitaker says he will work against any state contract with a private developer for payments in lieu of taxes that would deprive his community of its full property tax receipts from a gas line.

The borough has a seat on the municipal advisory group advising the state on its negotiations for a long-term fiscal contract covering the proposed North Slope natural gas line. Proponents of a contract for payments in lieu of all state and municipal taxes say it could bring a stronger measure of fiscal certainty to the $20 billion privately built project to pipe gas across Alaska, through Canada and into Lower 48 markets.

“Certainty does not mean decrease,” Whitaker said.

“It is clear that the intention is that there be a rationale in the reduction of a tax regime,” he said. “It is unacceptable not to show proof.”

No argument there, said Steve Porter, deputy commissioner at the Department of Revenue and liaison to the municipal advisory group. “In any negotiations we should understand the fiscal impacts.”

Whitaker sent a letter March 12 to state Revenue Commissioner Bill Corbus, whose department is the lead agency in the contract negotiations. “The intent of the Stranded Gas Development Act is to require full understanding of the economics of a North Slope natural gas pipeline project in order to provide conclusive evidence as to the necessity of a revised tax regime on the part of the state and affected municipalities,” Whitaker said in his letter.

Borough to protect its legal rights

Whitaker said his push to ensure that the state follow the law in its contract talks for a privately built gas line is separate from the borough’s effort through the Alaska Gasline Port Authority for a municipally owned project.

While he wants the state to remember the borough’s legal rights, he also intends to continue advocating that the port authority’s proposed natural gas project would be in the best interests of the state and municipalities.

Negotiations have been under way for almost two months with two contract applicants under Alaska’s Stranded Gas Development Act: MidAmerican Energy Holdings Co., a pipeline and power company from Des Moines, Iowa; and a joint venture of the three major North Slope producers.

The borough likely would see the greatest effects during project construction when thousands of workers will be on the job, pushing up municipal expenses for a wide range of services, Whitaker said. He is worried that any effort to defer property tax payments until a gas line is up and running and generating cash flow could hit the borough when it most needs the money.

“It is counter-logical” to reduce borough tax revenues during the period of its greatest expenses, he said.

State aware of construction impact concerns

For example, Porter said, a municipality with a 20 mill annual property tax rate would receive $40 million if $2 billion worth of gas line property were within its boundaries. But if the socioeconomic study showed the community would incur $20 million worth of construction-related costs during the year, such as police and fire and road services, perhaps the Stranded Gas Act contract could ensure that the municipality receives the $20 million it needs that first year with the remainder deferred until the gas line starts producing income for its owners.

Whatever comes out of the negotiations, there will be no tax holiday, he said. “It could be a deferral or a changing in timing.”

Whitaker, however, is worried his community could come up short. As a legislator, he helped block passage in 2002 of a project-incentive measure that would have cost municipalities millions of dollars in property tax revenues during construction of a gas line. He left the House last fall, after winning the borough mayor’s job.

State law sets out contract requirements

• The terms should improve the competitiveness of the project.

• The state and municipal share of the economic rent of the project should be progressive, with a higher share for government as the project gains in profitability and a lower share for government when profits are down.

• The state and municipal share of the economic rent should be lower in the earlier years than in the later years.

• Payments to municipalities should be based on any anticipated economic and social expenses that would be imposed on municipalities during construction and operation of the line.

Under existing property tax laws — and unless a different structure is adopted under a Stranded Gas Act contract — municipalities along a gas line route would see their tax revenues fall as the pipeline gets older, just as has happened for the trans-Alaska oil pipeline. Because the property tax assessment would take into account depreciation on a gas line, its value — and tax payments — would decrease over the life of the project.

Municipal property tax revenues also generally would be immune to the value of the gas through the pipeline, shielding the communities from periods of low prices but giving them no benefit during times of high prices — unless this too were addressed in a Stranded Gas Act contract.