Tuesday, May 23, 2006

Full Senate Passes Petroleum Profits Tax Again

This news is now 12 hours old, but I waited to combine reports from the Anchorage Daily News, the Fairbanks Daily News-Miner, and KTUU Channel 2 in Anchorage to provide a broader perspective.

Last night (May 22nd), the Alaska State Senate passed a petroleum profits tax bill for the second time during this session, by a 15-4 vote. After Democratic Minority Leader Senator Johnny Ellis (D-Anchorage) served notice that he wanted a reconsideration vote, the Senate reaffirmed it on reconsideration earlier today by the same 15-4 vote. Senator Gretchen Guess (D-Anchorage Mountain View) was excused.


1). A 22.5% base tax rate.

2). A 20% tax credit on capital investment within the state of Alaska.

3). A windfall profits threshold, or escalator clause. The base tax rate of 22.5% would increase by 0.1 percentage points for every dollar above $50 per barrel.

Expected Effects: Legislative analysts expect that state revenue will increase by $2.2 billion per year, assuming a $70 per barrel price. State economists, expecting more fluctuation in the price of oil, expect an increase of $1.2 billion or more next year, based on their oil price projections.

The "no" votes came from Senate Democrats worried that the proposed tax rate is too low and that oil companies would be able to manipulate their deductible costs to reduce their tax burden. "I truly believe that Alaskans someday down the road ... will regret the day their Alaska Legislature passed this legislation," Sen. Ellis said. Sen. Hollis French, D-Anchorage, said he thought the tax would generate a lot less revenue than everybody expects. "I'm very, very concerned that we're going to get a shock," French said.

French (pictured at left) was amongst several Senate Democrats who introduced amendments before the vote was taken Monday night. One amendment would have raised the base tax rate to 25 percent. Another would have changed the effective date from April to January. The effect of both these amendments would have been more tax revenue to the state, and in the case of the changed effective date, hundreds of millions immediately.

French also introduced amendments to put a floor on the tax so the state wouldn't lose money and to make sure that deductible costs were made in Alaska only. Two other amendments would have forced the expiration of unused tax credits after 10 years and exempted the undeveloped Point Thomson gas field from receiving state subsidies for development.

All the amendments were rejected without debate.

On Saturday, Governor Frank Murkowski had introduced into the special session a new petroleum production tax bill with a 20 percent tax rate and no escalator tax. Murkowski says his bill, with its smaller tax burden on the oil industry, provides the best balance of taxes and incentives for companies to develop the declining North Slope oil fields. His assessment was based on the industry's original preference for no more than 12.5%.

At the end of the regular session, the governor's office had said they could accept the House's 21.5 percent rate with an escalator. On Monday, Murkowski declined to say whether he would sign the Senate's bill if it passes the full legislature. "Let's wait and see what comes out of the sausage grinder, shall we?" Murkowski said.

Murkowski proposes to take the terms of the petroleum production tax and include them in the gas contract with BP PLC, ConocoPhillips and Exxon Mobil Corp. If the full legislature votes to lock in those taxes for decades, and the courts uphold that tax freeze, it will give the companies the tax stability they say they need to build a natural gas pipeline from the North Slope to Canada and Midwestern markets.

The State Senate approved an earlier version of the tax bill in April, but rejected it in the final hours of the regular session when it came back from the House. They were unhappy with the changes House members had made to the bill in a marathon all-night session the day before.

The House Finance Committee cancelled a hearing today to discuss the petroleum profits tax. The state Legislature is now starting a week-long break in the special session.

Here's the official roll call published in the Fairbanks Daily News-Miner (Senators' names in italics):


Republicans (12)
Bunde, Anchorage; Cowdery, Anchorage; Dyson, Eagle River; Green, Wasilla; Huggins, Palmer; Seekins, Fairbanks; Stedman, Sitka; B. Stevens, Anchorage; G. Stevens, Kodiak; Therriault, North Pole; Wagoner, Kenai; Wilken, Fairbanks.
Democrats (3)
Davis, Anchorage; Hoffman, Bethel; Olson, Nome.


Democrats (4)
Ellis, Anchorage; Elton, Juneau; French, Anchorage; Kookesh, Angoon.


Democrats (1)
Guess, Anchorage.

Analysis: The 22.5% rate better reflects the oil companies' ability to pay, based upon their record profits and profligate compensation of senior executives. It will also lock in tax rates for an extended period. However, the House needs to look hard at that 20% credit for capital investment. The producers may need a higher tax credit to swallow the 22.5% tax rate, unless our Congressional delegation comes up with a way to reduce or eliminate Federal taxation on the 20% credit.

Related Previous Posts:
Senate Finance Committee Passes 22.5% Petroleum Profits Tax, May 20th, 2006
Alaska State House Passes Oil Tax Bill, May 9th, 2006
House To Act On Senate Oil Tax Bill, April 27th, 2006
Full Senate Passes Oil Tax Bill, April 25th, 2006
Proposed New Alaska Petroleum Profits Tax, April 9th, 2006

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