Sunday, April 23, 2006

Full Senate To Consider Oil Tax Bill

Last night (April 22nd), the Alaska State Senate Finance Committee completed the final version of SB305, their version of the revised Petroleum Profits Tax. The full Senate will consider the measure beginning on Monday (April 24th). Read the full story in today's Fairbanks Daily News-Miner. See my previous post on this subject for more background. Provisions as follows:

1). A 22.5% tax on net profits. This change was proposed by Senate Finance Committee Co-Chair Lyda Green (R-Wasilla, pictured above) to better reconcile the Senate's original proposed 25% with the House's proposed 20%.

2). A 25% tax credit rate on capital expenditures. This is an increase over the original proposed 20% tax credit and is designed to better encourage new exploration and secondary recovery.

3). A windfall threshold of $50 per barrel, with the "escalator" in the PPT rate increasing 0.02 percentage points for every dollar over the $50 threshold. This is an increase over the original proposed $40 per barrel threshold, and doubles the original proposed escalator of 0.01 percentage points. This was proposed by Senator Lyman Hoffman (D-Bethel, pictured below).

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. This was strongly recommended by the Anchorage Chamber of Commerce to promote even more vigorous exploitation of this area, since it provides so much of Alaska's energy.

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.

Analysis: The Senate Finance Committee expects this bill, if adopted, to produce an additional $1 billion in revenue per year. The 22.5% PPT is a reasonable reconciliation of the two competing proposals. The 25% credit is more liberal than that proposed by Governor Frank Murkowski and is designed to address the producers' objections to the higher PPT and the retroactivity. Increasing the windfall threshold will serve as an incentive for further production to increase the supply and stabilize or even reduce costs to the consumer. This appears to be a good compromise. However, there are differences between the state and the producers in forecasting future revenue. These differences are further addressed in another News-Miner article.

Each legislative caucus has issued their own positional statement on energy resource taxation. Read the Republican statement here, and the Democratic statement, provided by Senator Johnny Ellis (D-Anchorage), here.

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