Monday, October 30, 2006

Prominent Alaska Economist Endorses Proposed Gas Reserves Tax In Alaska's General Ballot Measure 2

Joining a growing list of notables like Walter Hickel, Representatives Harry Crawford and Les Gara, and former Democratic gubernatorial candidate Eric Croft, who all support Alaska's General Ballot Measure 2 is prominent Alaska economist Gregg Erickson (pictured at left, courtesy of the Juneau Empire), who writes for the Alaska Budget Report (available by subscription only), and is a regular editorial contributor to the Anchorage Daily News and the Fairbanks Daily News-Miner. His column, laying out the case for a gas reserves tax, is presented in full in the October 29th edition of the News-Miner. Pertinent excerpts reproduced below.

...I’m voting yes for other reasons. These companies paid us money for rights to this gas, but the leases involved a carrot AND a stick. The carrot was that they got to keep most of the gas they could produce. The stick was that after 10 years, if they hadn’t produced any gas, they lost the lease. In the intervening 40 years the stick part got lost in the political shuffle.

Then prime intent and purpose of Ballot Measure 2 is to restore the "stick". It is not a nuclear strike against the producers. This "stick" will also give us a bargaining chip we can use to persuade the producers to build an all-Alaska LNG (liquified natural gas) spur concurrently with the main pipeline along the highway route. If they agree to build the spur, we delay or even kill the tax. Everyone talks about the Canadian and Lower 48 market; what about the burgeoning Asian market? The LNG spur can be used to supply the Asian market after meeting our own needs.

In 1964, if you’d told Phil Holdsworth, Alaska’s first commissioner of natural resources, that these companies would still have these leases in 2006 without ever having developed the gas, he’d have said you were crazy. Ditto other officials of that era, including politicians like Bill Egan, John Butrovich and Wally Hickel. What happened is the process got corrupted. Not in the old-fashioned sense of bribes (though there may have been more of those than we thought). I mean by campaign contributions, donations to nonprofits and slick “public communications” campaigns that allowed the deal we struck in the 1960s to be changed, little by little, in the companies’ favor. I’m voting yes on the initiative because it’s the one tool voters have that might put these deals from the 1960s back on track.

How often have good intentions been derailed by incremental corruption? The French Revolution got corrupted by Jacobinism, which was a dress rehearsal for the subsequent Bolshevik Revolution in Russia. The Mothers Against Drunk Driving (MADD) campaign against DUI, originally intended to spread awareness, create a baseline framework of sensible laws, and promote constructive behavioral change, got corrupted by neo-prohibitionism, spawning an endless litany of increasingly draconian laws, to include Soviet-style roadside checkpoints. And the American civil rights movement is a textbook example of incremental corruption. Originally intended only to end involuntary segregation and establish baseline equal opportunity, it first got corrupted by "preference" through affirmative action. Involuntary segregation was not replaced by permitting and guaranteeing free choice, but by forcible integration through mechanisms such as forced busing and forcible "blockbusting". Now the civil rights movement is being further corrupted by a move towards "reparations".

The problem is that, spread out over a period a time, the corruption becomes more palatable because people lose historical perspective. It's like turning on the stove AFTER the frog jumps into the pot of water; by the time the frog realizes it's being boiled, it's dead.

Sponsors of the initiative have virtually no money to make their case, but that’s not a huge disadvantage. The sponsors’ biggest problem is that Alaska law allows the producers to keep their oily fingerprints off money they give to organizations and people that agree to campaign against the initiative. Through the use of these front organizations the industry has gotten traction with two arguments.

The first is that the initiative will discourage exploration. The reserves tax only applies — and would only ever apply — to the 554 square miles in the Prudhoe Bay and Point Thomson units. So right off the bat the initiative has no effect on exploration in the other 99.9 percent of Alaska.

As for exploration within the units, a tax on the value of a known natural resource always increases the incentive to develop that resource. This is not a new idea. Adam Smith, the founding father of economics, grasped the essence of it in the 18th century, and economist Henry George developed it in the 19th. Tax capital and labor too heavily and they flee. Land and already-discovered natural resources are different. They can’t leave. A rational plan to encourage economic development will tax on the value of such God-given resources. Add value by production, or lose the resource to someone else who hopefully will.

The companies’ front organizations have also marketed the idea that the initiative will tie the state up in litigation, blocking efforts to move forward with a gas pipeline...If the initiative passes, the companies will file lawsuits. It’s an intimidation tactic they’ve used effectively: in 1973, when they sued to block the state’s attempts to regulate the trans-Alaska oil pipeline, and again in 1978, when they challenged a separate accounting income tax.

In neither case did the companies win in court. The 1978 lawsuit is instructive: Though it was completely without legal merit (it lost in every venue and was appealed all the way to the U.S. Supreme Court), the companies won in the political arena. The uncertainty created by the legal challenge — together with generous campaign contributions — persuaded legislators to capitulate. I can’t promise that won’t happen again.

The threat of litigation is frequently used to dampen and derail many reform efforts. People should evaluate Ballot Measure 2 by its absolute merits, and not allow themselves to be psychologically blackmailed into voting against it simply because of the threat of litigation.

The initiative is no silver bullet. The Legislature can amend it as soon as it becomes law and repeal it after two years. You can bet the oil companies will have ideas along those lines. With the three leading gubernatorial candidates opposing the initiative, we can hardly expect the new administration to vigorously enforce its provisions. But passing the initiative will send the right message. At this point, I’ll count that a victory.

And the message is simple - we insist on being the partners of the producers, not their servants. The producers have contributed frequently and generously to the welfare of our state. However, this does not justify them trying to get over on us. They are clearly trying to scare us away from voting for this measure. On Election Day, vote our pocketbooks - not our fears. Vote Yes on 2.

Gregg Erickson is a Juneau economic consultant and editor-at-large of the Alaska Budget Report, a newsletter covering the state budget and economy.He is also an expert on natural resource policy in Alaska. He played a major role in designing and implementing the Alaska Permanent Fund, which pays annual dividends to all Alaska citizens from a fund derived from oil revenues. He has published extensively on issues of taxation, economic development, and management of oil and timber. He has also held appointments to Alaska state offices and lectured at the University of Alaska. He maintains an economic consulting business, Erickson & Associates, in Juneau, Alaska, which he calls home. He also serves as treasurer for the Robert Schalkenbach Foundation.

This foundation is intriguing. Here's a description of it from their website:

The Robert Schalkenbach Foundation (RSF) was organized in 1925 as an operating foundation to promote public awareness of the social philosophy and economic reforms advocated by Henry George (1839-1897), including the "single tax on land values". To this end, RSF publishes and distributes books and articles, particularly those of Henry George, including his classic work, Progress and Poverty. This and other works can be found in our on-line library. Books by Henry George and other authors are available for purchase from our on-line bookstore.

In addition, the Foundation conducts scholarly research and carries out other projects to promote the principles of Henry George as they apply to issues of current interest.

Henry George began with the ethical premise that all people have an equal right to the use of the earth. From that he concluded that exclusive private ownership of land (natural resources) creates unwarranted special privileges. Furthermore, he observed that holding land out of production drives down real wages and the returns to capital equipment. This process is further exacerbated by taxes on production and income that 1) increase unemployment, 2) discourage productive investment, and 3) encourage unproductive land speculation and rent-seeking. To counteract this self-destructive system, George advocated shifting taxes from labor and capital onto the value of land and natural resources.

Another name for this philosophy might be "cooperative individualism". There are some beneficial aspects to it. It provides sound justification for an initiative like Ballot Measure 2. However, it is also a double-edged sword. I can see potential for its misuse and overzealous application. Supposing you have a piece of land that you leave in its natural state so you can enjoy the natural beauty. However, your local borough or city decides it's "unproductive use of the land", and seizes it by eminent domain. The phrase "all people have an equal right to the use of the earth" has socialistic implications that cannot be ignored and must be corrected for in advance.

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  1. You wrote about preserving a beautiful piece of land so that you can enjoy it in its natural state.

    That sounds great to me -- until the city expands toward that piece of land. At that point, we-the-people are paying to provide police, fire, paved roads which require plowing, city water, city sewer, perhaps public transportation. Your plot of preserved nature forces those who need a place to live to leapfrog beyond your private park. We all expend our time (commuting from housing we can afford to jobs and shopping, for example) and energy (calories or non-renewable fuels) and probably create pollution, in order to honor your privilege of keeping that land natural.

    Seems to me that our incentive systems should be set up to encourage compact development, and if you want to live on a pristine natural spot, you can move when the fringe moves. We shouldn't all be asked to subsidize you on your parklet!

    The good news is that this sort of tax policy does encourage compact development, so that the fringe moves very slowly. Downtown sites will be redeveloped to meet current needs, protecting nature on the fringe.

    If your "piece of nature" is downtown, it should be developed, because doing so will save many more acres on the fringe from premature development. If your "piece of nature" is on the fringe, these policies will slow the outward march of development, and work to keep it pristine.

    And of course there is another option: if your neighbors agree that your piece of nature is really valuable to everyone as such, the town could buy that piece of land from you and make it into a park that everyone can enjoy. And you won't need to worry about keeping it fenced, or paying taxes on it, or liability insurance. It will be serving a public purpose.

    And interestingly, getting the incentives right will tend to reduce the use of eminent domain, not increase it. The private sector will do things, rather than "command and control" things like eminent domain being needed. Kind of organic!

  2. If the property owner is paying property taxes on the undeveloped parcel, I don't see where we would be forcing the general public to subsidize it.

    Your point about urban sprawl is well taken. However, urban sprawl is a quality of life issue, triggered by those who do not want to hear their neighbors' stereos or domestic disputes, or be subject to endless traffic noise, so they move outward to get their trophy home with their 1/4 acre of land in the suburbs. Consequently, multi-family housing in cities is a tough sell to families. This works against compact residential development. Until people increase their mutual respect for one another, and modify their personal behavior accordingly, urban residential development will tend to appeal primarily to childless professionals (although it would be useful to market this option more effectively to seniors, many of who can't or don't drive).

    Getting the incentives right requires a careful balancing act in which revenue enhancement is not allowed to supersede quality of life.