Recent oil tax hike hurting Alaska’s economy

Alaska Rep. Vic Kohring

It is a truism in political economy that higher taxes cause lower production. Put another way, if we in the Legislature wish to increase revenue into our treasury, tax rates must be lowered. The state recently found a legal way to take an additional $190 million in taxes from oil companies, and the results are quickly becoming evident. There is already evidence that activity in Alaska’s oil patch is growing less than expected.

When arbitrary and instant new taxes are laid upon the oil and gas industry, the effect is that producers begin to reexamine where they place their investment dollars. The uncertainty of not knowing when new taxes will fall like a Guillotine, is causing money that would have been spent in our state’s economy to be spent elsewhere. Case in point: since the new taxes were announced in January, BP Exploration’s “I-100” well at Prudhoe Bay has been deferred indefinitely. That well was supposed to have been drilled this winter. It was intended to be an “appraisal well” for the Orion Satellite area in the western part of Prudhoe.

The word from industry people is they intend to invest less than originally planned. They believe the state unfairly changed tax rules on the slope after investment decisions were made. One of the best things the state can do to encourage economic growth and prosperity is to have low taxes and a stable, known regulatory and tax policy. These tax increases may bring in temporary millions of extra revenue, but they are compromising the entire oil trade. It’s like winning a minor battle, but losing the war.

When you are investing billions into huge projects, you must clearly know the rules in advance. Can you blame oil company planners for asking how they are supposed to plan if the state’s policy is prone to sudden change?

ConocoPhillips, hurting under the state’s new policy, has delayed portions of the Orion satellite field indefinitely, as the project is no longer able to compete with other investment opportunities elsewhere. That means money that would have gone into the pockets of Alaskans will now end up somewhere else. This is one of the unintended consequences of instant taxation.

If giants like BP Exploration and ConocoPhillips are finding these new taxes a major challenge, smaller independent companies like Anadarko and Unocal that planned forays into Alaska oil fields will have much less of a chance. Small companies don’t have the resilience and ability to absorb millions of dollars in taxes. The consequence will be fewer Alaskans employed on the slope, and fewer dollars flowing into the state treasury in the long run.

As these delays begin to reverberate through the economy, the state Department of Revenue Fall Forecast earlier predicted a $450 million windfall from the Orion field. Obviously, if ConocoPhillips delays or ultimately decides not to drill at all, the state will have taken in $150-$190 million in new taxes, but lost $450 million in future revenue!

I call on the state to take a new look at the effect of this new tax policy now that the facts are becoming known, and consider reversing it. We should not wait until there are new and even larger cancellations of Alaska oil projects.

We have had the most robust oil production in the world and the lowest prices for gas and oil relative to Europe and Asia. We got that way because of a tradition of having freer markets and lower taxes. Let’s not charge our way into the abyss of a Third World Economy that government intervention often causes. Free the markets. Free the entrepreneurs and let the outcome be as it used to be … the envy of the entire world.

Note: Rep. Vic Kohring is Chairman of the House Oil & Gas Committee, and serves Wasilla and the Mat-Su in the Alaska State Legislature.