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State legislators seek oil tax change Proposal from four Democrats would tie Alaska production tax rate to price of oil Larry Persily Petroleum News Government Affairs Editor
Regardless of the strong odds against winning legislative approval for any changes, four Alaska House members say it is time the state looked at the 15-year-old formula that allows 18 of 21 North Slope fields to pay one-quarter or less of the state’s full production tax rate.
Proponents of changing the tax code’s incentive formula for small fields and low-production wells — the Economic Limit Factor, or ELF — say Alaska is giving up too much revenue, especially at high oil prices. They propose adding a minimum tax rate and also a price factor to the formula, similar to imposing a higher rate on upper-income households under a progressive income tax structure.
Of the 18 oil fields taxed at significantly reduced rates under ELF, 14 pay between zero and 1 percent on the wellhead value. Those 14 fields produced about 140,000 barrels of the 990,000 barrels a day that flowed from North Slope wells in Fiscal 2003. Sponsor says no tax ‘unacceptable’ The ELF “is the big elephant in the room no one wants to talk about,” said freshman Rep. Les Gara, D-Anchorage, one of the co-sponsors of House Bill 441 to amend the formula. “It’s time to talk about it. … It’s irresponsible to grant excessive loopholes and exemptions,” especially when the state is cutting public services because of a serious budget gap, he said at the Feb. 5 press conference.
Opponents say changing the tax formula would dissuade companies from investing in Alaska, costing the state more in the long term than it might gain from short-term boosts in revenue. Besides, they say, the state still receives its 12.5 percent royalty share on most oil drawn out of the ground, even if the production tax rate is zero.
Royalties produced $840 million for the state general fund in Fiscal 2003 vs. $600 million in production taxes. More state revenue at high prices The tax changes proposed in the bill would generate an average $120 million a year more for the state with oil at $22 a barrel vs. $400 million a year more for the state at $30 oil, according to Department of Revenue estimates for 2006-2016. Proponents say the state deserves a bigger share of the money when prices are high, pointing to a department estimate that shows producer profits from North Slope production at $3.24 billion a year at $30 oil vs. the state’s share at $2.1 billion.
The oil industry’s response to the bill is that the tax incentive is working as planned, encouraging production that would not otherwise have occurred if taxed at the full rate.
Alaska’s full production tax rate is 15 percent of the wellhead value, but not even Prudhoe Bay, the state’s largest field, pays the full rate. Prudhoe is at about 12.8 percent, and only two other fields pay above 10 percent. All other fields fall between zero and 3.5 percent.
The Department of Revenue estimates the average North Slope tax rate will be 7.6 percent in Fiscal 2004, falling to less than 5 percent by 2013 as more of the new low-tax or no-tax production replaces declining Prudhoe Bay flows.
In addition to questioning the fairness of letting state resources leave Alaska at a zero production tax rate, the bill’s four Democratic sponsors say extra revenue to the state during periods of high oil prices could help close Alaska’s budget gap.
“The proposal is fair … it is long overdue,” said Deborah Vogt, deputy commissioner at the Department of Revenue from 1995-1999. “That oil will not grow back.”
Besides adding a price factor to the tax rate, the legislation proposes establishing a minimum 5 percent tax that would be cut in half when prices drop below $16 a barrel. All heavy-oil production would be exempted from the minimum tax and other changes, with the bill’s sponsors acknowledging the thick-flowing crude is more costly to produce, justifying the low- or no-tax rates. Companies aren’t flocking to state Looking at a change in oil taxes to help fill the state treasury is not a good idea, said John Manly, press secretary to Gov. Frank Murkowski. “It sends a mixed signal,” as the state at the same time is starting negotiations with North Slope producers to build a $20 billion pipeline to move Alaska gas to market and also trying to entice the majors, and independent producers, to invest more money in the state.
Murkowski said he does not believe that changing Alaska’s tax code for small fields and low-production wells is the answer to the state’s budget gap.
“Keep in mind, Alaska is already ranked as the most expensive onshore basin in the world,” the governor said Feb. 10. “If our current ELF policy were so out of touch with return of revenues to the state, why are there not more major companies anxious to open up new fields to take advantage of the ELF incentive? Why, for instance, did BP discontinue new exploration in Alaska?” Legislative hearing in doubt The chairman of the House committee charged with helping to find a solution to the state’s revenue shortfall said the oil industry should be considered along with every other potential source — including the tourism industry — in putting together a sustainable, long-term fiscal plan for Alaska.
“There is a role for them as part of an overall, structured solution,” but changing the ELF is not the best way to get there and he does not support the bill, Ways and Means Chair Rep. Mike Hawker said two hours after the Democrats’ press conference.
“At some point very soon everybody is going to have to chip in,” Gara said. The state faces an almost $600 million budget gap next year with oil projected at close to $26 a barrel, with the shortage climbing to $1 billion if oil falls to $20 a barrel, he said.
The other co-sponsors are Reps. Beth Kerttula of Juneau, David Guttenberg of Fairbanks and Eric Croft of Anchorage. Bill likely to die in committee Hawker, a freshman Anchorage Republican, said he would consider holding a hearing on the bill, though he believes rewriting the oil and gas production tax code is too complex and risky an undertaking for the three months remaining in the legislative session.
And even if it makes it through its first committee at Ways and Means, it will die in its next committee, pledged the chairman of House Oil and Gas, Rep. Vic Kohring, R-Wasilla.
Kay Cashman contributed to this story.
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