Alaska Oil Tax Reforms – A Huge Gamble Begins to Pay Off

When most states introduce legislation to reduce or eliminate their personal income taxes, or any other tax, while still remaining revenue neutral, they generally meet with the same objections. In order to generate the shortfall in revenues, it is usually necessary to increase sales taxes, increase property taxes, expand on the goods and services subjected to taxation, and the like. Lobbyists take on this cause as being a direct affront to the poor, for the benefit of the wealthy. The strength of this opposition usually determines whether the bill passes or fails.

The State of Alaska never needed to concern itself with these roadblocks, and they can thank their oil and gas industry for that. For the past forty years, revenues derived from their energy sector has generated 93 percent of the state’s general fund revenues — $8.9 billion dollars in FY 2012. This fund pays for nearly every state service, including education, infrastructure, public health and safety. In 1976, the state also established the Alaska Permanent Fund to set aside a portion of oil revenues for future generations. At the end of 2012, there was $43.6 billion in the fund, and from this fund more than $13 billion has been distributed as dividends to Alaskans. As a result of oil and natural gas revenues, Alaska is one of only nine states without a personal income tax. There are also no sales taxes levied directly by the state, although the local municipalities are free to levy their own. Alaska’s state and local tax burden is ranked the lowest in the nation, by taxfoundation.org.

While this may all seem like an economic nirvana for Alaska, they also find them themselves in a very vulnerable position. Their good fortunes are tied directly to the rate of production of the natural gas and oil companies who drill within their state. All of Alaska’s fiscal “eggs” are essentially in one basket, and their edge in oil production is slipping. Between 1992 and 2010, the state lost $1.67 billion in annual Adjusted Gross Income (AGI). Their largest oil production competitors of Texas and North Dakota are gaining ground. The Alaska Pipeline is running nearly three quarters empty.

Oil tax reform seemed the only way to stem this negative slide in production by providing a significant tax relief stimulant for oil companies. There are still huge oil reserves in the North Slope and off the continental shelf. New technologies are available, but without the means to increase profits, energy companies will not make the investments in either exploration or production. Many may move operations elsewhere. In addition, outside companies would have no incentive to relocate there.

In January of 2013, Alaska Governor Sean Parnell proposed Senate Bill 21. Senate Bill 21 eliminates the complicated “progressivity” feature of the current tax system and replaces it with a simple 35 percent base rate and a per-barrel tax credit tied directly to the production of oil. Obviously, any legislation that inflicts a reduction in state revenues for future potential rewards is risky business, and the proposal had to overcome huge hurdles in the state legislature. But on April 16, 2013, the last day of the legislative session, the bill was passed.

We are now in October, and it appears the governor’s gamble is paying off. At a recent meeting of the Alaska Support Industry Alliance, BP Alaska president Janet Weiss said that a “slew” of new projects and investments on the North Slope are being made possible because of the new law. Ms. Weiss foresees new jobs, thirty to forty new wells to be drilled each year for the next five, more pipelines and processing facilities. All good news for the governor, bold legislators, and the citizens of Alaska