Wednesday, May 17, 2006

Alaska State House To Re-visit Petroleum Profits Tax

Spurred on by Governor Frank Murkowski's continued calls for a finalized petroleum profits tax (PPT) bill, thirteen House members met in an informal work session yesterday (May 16th) to re-visit the PPT proposal that failed by a 10-10 vote in the full Senate last week. See the full stories in both the Anchorage Daily News and the Fairbanks Daily News-Miner.

The representatives, led by Rep. Paul Seaton (R-Homer, pictured at left), are members of the House State Affairs and the House Ways and Means Committees. Seaton said he called the meeting before learning that Gov. Frank Murkowski might be rolling out a new petroleum production tax bill as early as next Monday (May 22nd). He further stated that he had not seen the bill and did not know the terms. The Governor's new spokesman, John Manly, said he also had not seen the terms, adding that a final decision had not been made yet on whether to introduce the bill. He said the governor would have to expand the call of the special session to do so. Manly further stated that the Governor would be holding a press conference on Monday to discuss proposed amendments to the Stranded Gas Act.

Lawmakers have been briefed by Murkowski administration officials at Juneau's Centennial Hall since last Wednesday in a special session on a natural gas pipeline contract that Murkowski negotiated with Exxon Mobil Corp., BP PLC and Conoco Phillips. The contract is seen as a major step toward building a $25 billion natural gas pipeline from the North Slope to Canada and markets in the Midwest. But the three oil producers want the oil and gas tax rates set in the profits bill rolled into the contract and locked in for 30 and 45 years. The two hour meeting Tuesday night was the first discussion on the oil and gas tax bill since the Legislature adjourned last week without passing the measure. The failure to finalize a petroleum profits tax is a major roadblock preventing further progress on the proposed gasline contract.

Rep. Mike Kelly, R-Fairbanks (pictured at left), said lawmakers should keep in mind the possibility of increasing the tax rate to 22.5 percent, a move he supported on the House floor, when taking up the tax issue. "We had a bill and it was blocked from passage because the tax rate was too low," he said.

Rep. Seaton wants to explore and resolve differences between the Senate's original version (22.5% PPT) vs. the House version (21.5% PPT) defeated by the Senate last week. Amongst the major differences:

1). Whether the escalating factor in the tax rate should be based on companies' net or gross profits, and at what point the tax rate should start to increase.

2). How best to provide a separate tax rate for gas production in Cook Inlet, where costs are higher and profits lower.

3). The effects of the different standard deductions meant to encourage new exploration by smaller, independent producers in the various versions of the bill.

4). The effect of the $25 million transferable tax credit on the producers' tax liability.

5). How to address expenses incurred by the producers outside of Alaska.

At the work session, lawmakers said they also want consultants to gather more information on other differences between the two bills such as a tax on the net versus gross production.

Analysis: One of the major sticking points with the proposed gasline contract is the producers' demand for tax rates to be locked in for periods of 30 years and 45 years. The producers require tax stability to better calculate risks and costs. However, such time periods are simply too long; there are too many variables. What would work better is guaranteed stable tax rates during the period of actual pipeline construction and during the initial operation of the pipeline until initial costs are recovered. This would presumably be much shorter than 30 years. However, for the producers to agree to a shorter period, they must be offered incentives elsewhere. A properly constructed PPT bill, providing a realistic profits tax based on the producers' actual ability to pay and current world benchmark prices, while allowing liberal deductions and tax credits for reinvestment into new exploration is the way to go. An issue for our Federal lawmakers to resolve is Federal tax liability for state tax credits. Our Congressional delegation should work to eliminate any Federal tax liability on state tax credits for the producers simply because of the magnitude and necessity of the project. Such a concession might give the producers an additional incentive to agree to a shorter tax stability period. In the final analysis, we simply cannot afford to lock in a single tax rate for a period as long as 30 years.

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