Tuesday, April 25, 2006

Full Senate Passes Oil Tax Bill

On Monday April 24th, 2006, the Alaska State Senate passed the oil tax bill providing for a higher tax rate but offsetting the higher rate with a bigger investment credit than that originally proposed by Governor Frank Murkowski. The vote was 14-6, with all 12 Republicans and two Democrats, Sens. Lyman Hoffman (D-Bethel) and Bettye Davis (D-East Anchorage) constituting the majority. Read the full story in the April 25th issue of the Anchorage Daily News.

Primary provisions of the bill as follows:

1). A 22.5% tax on oil company profits.

2). A 25% deduction on profits invested in Alaska oil and gas development.

3). A windfall profits threshold of $50 per barrel, with an escalator clause of 0.02 percentage points for each dollar above the threshold.

4). Deletes a provision allowing producers to deduct costs before the the escalator would be charged.

5). Sets a special tax rate for Cook Inlet oil. The 5% rate would be effectively reduced to zero when combined with the 25% credit.

6). Sets an effective date of April 1st, 2006. This makes it slightly retroactive, which would produce $450 million of additional revenue this year and is acceptable within the greater context of this carefully-crafted compromise, but further enshrines the principle of retroactive taxation.

Synopsis: The bill that passed Monday differs from Governor Frank Murkowski's 20/20 proposal by assessing a higher profits tax but offsetting it with higher tax deductions for profits invested into further development. However, despite this proposed offset, the producers have already fired another shot across the state's bow. Brian Wenzel, ConocoPhillips Alaska's vice president of finance, not only opposes the Senate bill, but was quoted as follows,
"The real benefit of the governor's proposal is you had all three
producers...stepping up and saying 'We have an agreement'. Now we don't have
that agreement. (We'll) have to go back and reconsider..whether or not the gas
line goes forward."

Senator Johnny Ellis (D-Anchorage), the Senate's minority leader, gave notice of reconsideration of his vote, meaning the Senate can take it up again during its next floor session. He stated that Senate Democrats are likely to propose more changes and expressed objections to the bill, including the tax rate and its linkage to a still secret gas pipeline contract.

According to an analysis by Econ One, an independent consultant hired by the Legislature, this bill would bring in as much as $2.5 billion additional state revenue per year than the current tax regime, assuming a $70 per barrel price.

Analysis: The Senate Bill is designed to balance the need for us to get realistic compensation for a non-renewable resource with the need for producers to have a clear-cut incentive for further investment. Alaska's oil fields are declining; production is only half of what it was at it's peak. Yet the producers seem insensitive to the fact that, unlike other resources such as timber and fisheries which are renewable, oil is not renewable, and we need to have something to show for it when it's gone. The producers are also insensitive to the demoralizing combination of high fuel prices, windfall corporate profits, and exorbitant CEO compensation, which causes the general public to forget the visible, frequent, and generous contributions the producers make to various charitable and community causes throughout the state. The heavy-handed reaction to this bill by ConocoPhillips will further arouse resentment amongst the public by the implicit use of the gas pipeline as a weapon of political blackmail. Sustained high oil prices demand a change in previous taxation strategy; the producers need to accept the need for higher profits taxation and instead concentrate their efforts on getting the best possible exemption for reinvestment in Alaska's oil and gas development.

Click here for Ray Metcalfe's chart showing how we compare in oil taxation to the rest of the world.

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