Saturday, May 20, 2006

Senate Finance Committee Passes 22.5% Petroleum Profits Tax

The Alaska State Senate Finance Committee once again approved a higher tax on petroleum profits Saturday evening (May 20th). The specifics are a base tax rate of 22.5%, an additional "windfall profits" surcharge when oil prices exceed $50 per barrel, a 20% tax credit for capital expenditures, and a retroactive implementation date of April 1st. Click here for the full story from KTUU Channel 2 Anchorage and here for a related article in the May 20th Anchorage Daily News.

This differs from Gov. Frank Murkowski's proposed petroleum profits tax (PPT) bill, which called for a 20% base tax rate, 20% credit for capital expenditures, no windfall profits surcharge, and an effective date of July 1st.

Finance Committee co-chair Lyda Green says she thinks the oil industry will accept the higher tax rate. "I think they would prefer 20 or 21 and I actually would prefer a little lower, but at some point it's time now to get on and finish what we're doing," said Green. She expects the committee will pass the bill to the floor on Sunday, with final action on Monday. Afterwards the House will take action.

However, House concurrence may not be a slam dunk. Democrats have some significant objections to the bill, as spelled out in today's Daily News article. "There was a lot of garbage in the bill, and this time we're going to try to take some of the garbage out," said state Rep. Les Gara, D-Anchorage, one of the original proponents of oil tax reform. Gara and other Democrats say the Murkowski administration, as well as oil company lobbyists, worked too many tax breaks into the legislation. The Democrats also oppose basing oil taxes on company profits, rather than on crude production. They fear basing taxes exclusively on profits could allow oil companies to hide profits by inflating production costs, ultimately shortchanging the state.

Bill Corbus, the state's revenue commissioner, continued to defend the Governor's proposal. “We continue to believe 20-20 is the appropriate level to attract badly needed investment to reverse the decline in oil production,” said Corbus.

Analysis: I found out one reason why the producers are so opposed to any PPT over 20%. According to an article published in today's (May 20th) Anchorage Daily News, the producers originally wanted a PPT of no more than 12.5%. This means they agreed to a major compromise when they accepted Governor Murkowski's 20% proposal. So to ask them to accept a higher PPT may be too much.

However, large corporate net profits combined with stratospheric compensation of senior executives imply that the oil companies have the capacity to pay a higher PPT. To effectively balance both concerns, we pass a bill assessing a higher PPT but also permitting a higher tax credit to reward the producers for increased exploration and development. We also should not make it retroactive - retroactive taxation is theft! Also, keep the windfall profits threshold or escalator clause.

Another concern is the issue of Federal taxation of the proposed tax credit. To further motivate the producers to accept a higher PPT and take this risk, our Congressional delegation should work to either reduce or eliminate Federal taxation of any state tax credit awarded to the producers.

Related Previous Posts:

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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