Saturday, August 05, 2006

Showdown Between Frank Murkowski And Alaska State Legislature Over Oil Taxes Looming

A possible showdown over the nature of the proposed oil tax is looming between Alaska Governor Frank Murkowski and the Alaska State Legislature. Lately, the stalemate has been between a profits tax vs. a gross production tax. This is a composite post combining reports from KTUU Channel 2 and the Anchorage Daily News.

However, for the first time during this debate, the State House is restricting further debate to break the stalemate. Up until now, every lawmaker acted as a "free agent". But now, Speaker John Harris (R-Valdez) has decided to invoke caucus rules to get the Republican majority behind the newest version of the proposed oil tax, which is based on gross production rather than profits and further ties tax rates to oil company investments. In general, caucus rules require that all caucus members line up behind a particular legislative position or else face the type of sanctions that lawmakers like Bob Lynn and Nancy Dahlstrom received when they broke ranks with the caucus in the past.

I think there are votes in a bipartisan manner maybe for a different way to go about doing things, but we're trying to make this as much as possible a unified Republican approach, and hopefully it works,” said Harris.

House Democrats have been long-time proponents of a gross production tax rather than a profits tax. They predict clear sailing. “If we get a straight vote on the gross, it will pass overwhelmingly -- both the House and the Senate,” said House Minority Leader Ethan Berkowitz (D-Anchorage), who's also a candidate for Lieutenant Governor.

Another reason for this change in Republican strategy is that some House Democrats are so adamant about choosing gross vs. net, particularly Rep. Les Gara (D-Anchorage), that they say they're willing to go home with nothing, leaving hundreds of millions of dollars in potential state revenue behind them. “Adopting something that's an insultingly incremental change, which this is, given the amount of money that it gives back to Exxon and the other oil companies in terms of gas credits, it's not just worth it, because once you pass a bill, it stays there for 15 years,” said Gara.

Rep. Berkowitz also said the current version of the oil tax would revive Murkowski's gas pipeline contract because it eventually would give North Slope producers the 20 percent tax rate they say they need as part of that deal.

Proponents of a gross production tax say it's simpler to calculate while a net profit tax would increase the likelihood that oil companies could manipulate their cost claims in order to pay less tax.

Net profit advocates say that the auditing system the state employs now would prevent such manipulation and that a profit-based tax would encourage more investment in Alaska's aging oil fields.

One version of a gross production tax, earlier unveiled by Rep. Gara and reported in the Anchorage Daily News on July 27th, would impose a minimum tax of 5 percent of the value of the oil produced in all the fields in Alaska. The three fields that now pay above 5 percent would keep their existing tax rates. The rates would increase as the price of oil rose above $20 per barrel and decrease when the price dropped below $16 per barrel.

Gara justified his proposal at the time by saying that besides increasing revenue to the state, his plan also would encourage investment in three ways. First, his bill includes provisions to give independent producers better access to the North Slope. Second, oil companies would be able to appeal for tax relief if they provided proof of need. And finally, they would be eligible for exploration tax credits.

However, Republican Governor Frank Murkowski , who is running for re-election, threw a spanner in the works on Friday when he announced during a press conference his intention to veto any oil tax based on production rather than profits. Murkowski, who has introduced net profit tax bills three times this year, left no doubt about which side of the fence he stands on. "I want to put the Legislature on notice at this time that I will veto any effort to change the tax regime from a net to a gross," the governor said. "There is simply no justification for it, because it will not get the North Slope investment that we so desperately need."

Murkowski said he believed the proposed "produce or pay" plan was good in theory but the oil industry would think the tax rates were too high. "I'm pleased that it moved, but I'm not sure if the rate is going to be acceptable," he said.

Frank Murkowski faces a tough renomination fight against fellow Republican candidates Sarah Palin and John Binkley. Both have previously expressed support for the concept of a gross production tax over a petroleum profits tax.

The House was scheduled to consider a variation of Murkowski's original bill Friday afternoon. The new bill would set a tax rate of between 20 percent and 25 percent of oil companies' Alaska profits. Each company's rate would be based on the level of capital investment it put into the state. The companies' tax rates would then rise when the price of North Slope crude reached about $55 per barrel.

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  1. I have to wonder how much the shut-down of Prudhoe Bay has to do with future oil taxes negociations.

    Is BP flexing a little muscle?

  2. That's an interesting possibility. You have to wonder why they find it necessary to shut down the whole thing at once rather than incrementally.

    Perhaps the entire system is so interdependent that it must be shut down as a whole. But after what Enron did to California during the closing days of Gray Davis' regime, forgive me if I view this a bit conspiratorially.