Friday, November 16, 2007

Alaska State Senate Passes 25 Percent Petroleum Profits Tax; Back To House For Approval

The Alaska State Senate voted late Thursday night (November 15th, 2007) by a 14-5 margin to grant Gov. Sarah Palin and the State House the oil tax increase they wanted, passing a new 25 percent petroleum profits tax. Full story published in the Anchorage Daily News.

While most of the provisions replicate the House version passed on November 11th, there are some differences. Since the current special legislative session expires midnight Friday night, the House would have to accept the Senate's bill as is to avoid the prospect of another special session.

Here are the highlights of the Senate bill (unless otherwised noted, they are the same as the House version):

- Increase the base state oil tax rate from 22.5 to 25 percent of net profits.

- Charge an additional 0.4 percentage points more tax for each dollar the price of oil goes above about $52 per barrel. The House version sets a lower progressivity threshold; in their version, the progressivity rate, or surcharge, changes from 0.25 percent per dollar over $40 per barrel to 0.4 percent over $30 per barrel.

- Limit tax deductions the oil companies can claim for operating costs at the Prudhoe and Kuparuk fields on the North Slope. The deductions could only rise by three percent a year. This limitation would sunset after three years.

- Prevent companies from deducting costs arising from breaking the law or failing to comply with their lease obligations. That's retroactive to March 31st of last year to keep BP from deducting costs related to corrosion that led to a partial shutdown of Prudhoe Bay last year. It's in the House version as well, but with different language.

- Allow oil tax auditors to indefinitely be in a new job classification that allows higher salaries so the state can recruit them. The House version takes a different approach to getting auditors paid more; it drops a provision to move tax auditors out of the classified state service into the exempt service, but creates "audit masters" positions, who would be exempt.

- Allow the state revenue department discretion in deciding what lease expenses the companies can deduct from their taxes, rather than having the Legislature set all the allowable deductions.

The Senate version of the bill makes the tax increase retroactive to June 30th, 2007, bringing in an additional $450 million to the state this year alone. The state revenue department hasn't had a chance to estimate future revenues from the Senate bill yet, but they said the House version of the oil tax could raise $1.5 billion a year more in these times of high oil prices.

Two opponents of the bill spoke out strongly against it. Sen. Bert Stedman objected to the financial motivation, saying that the pieces in the bill add up to a "staggering" increase in tax, far above what it seems by just looking at the base rate. In contrast, Sen. Con Bunde (R-Anchorage) took issue with the ethical motivation, suggesting that it's "a bit of a fool's errand" to focus on re-establishing public faith in the Legislature. Bunde said it seems like the national sport is to go after political figures. This is typical "Bunde"; while personally clean himself, he's not known to be preoccupied with ethics. Nor for that matter is he known to be preoccupied with diplomacy, either.

However, one senator who favored the bill spoke up immediately afterwards and addressed the issue of tax stability straightaway. Sen. Johnny Ellis (D-Anchorage), in response to concerns over the fact that this is the third change in oil taxes in three years, said this tax should last for a long time. "It has taken extraordinary circumstances, a political crisis in the state of Alaska for us to muster the political will to make these adjustments," he said.

And what's the prospects of House approval? House Speaker John Harris said he needed to watch and see all the amendments the Senate passed Thursday night. But, just based on what it looked like earlier in the day, he was confident the House would accept it "in a heartbeat".

How they voted:

For: Bettye Davis(D), Kim Elton(D), Hollis French(D), Albert Kookesh(D), Gene Therriault(R), Lesil McGuire(R), Joe Thomas(D), Donald Olson(D), Tom Wagoner(R), Bill Wielechowski(D), Gary Stevens(R), Gary Wilken(R), Johnny Ellis(D), Fred Dyson(R).

Against: Lyda Green(R), Lyman Hoffman(D), Charlie Huggins(R), Bert Stedman(R), Con Bunde(R).

Abstained: John Cowdery(R). Cowdery recused himself in advance because of allegations of his involvement in the VECO scandal. He has NOT been indicted.

Commentary: My only objections are to the "retroactivity". I am philosophically opposed to retroactive taxation. Otherwise, it demonstrates to the big three producers that we intend to be partners and not supplicants. This is important considering Exxon's contemptuous attitude towards the state.

But this absolutely, positively must be the last change in oil taxes for the foreseeable future. With declining production and the increased costs of additional investment and production of "heavy oil", the industry has a right to some degree of tax stability.

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