Thursday, March 21, 2013

Senate passes oil tax reform

Tim Bradner
Alaska Journal of Commerce

State senators in Juneau narrowly approved a major rewrite of Alaska's oil tax law, passing Senate Bill 21 in a late-evening session Wednesday by a vote of 11-9.

The tax change will reduce state oil production tax payments by an estimated $4 billion-$6.3 billion over six years. Under the current law, known as Alaska’s Clear and Equitable Share, or ACES, the production tax payments would have been $22.3 billion over the six years.

Passed late Wednesday, the measure is aimed at stimulating new North Slope production and Trans Alaska Pipeline System throughput and still must be passed by the state House and signed by Gov. Sean Parnell.

Those approvals seem likely, although the House will likely add some changes. The House Resources Committee has scheduled SB 21 for its first hearing Friday, March 22.

Parnell proposed the tax change in January, although the Senate modified his plan. Parnell proposed a tax reduction more generous to industry in 2010, and while the House passed House Bill 110 the Senate did not accept it.

Parnell lauded the Senate passage of SB 21. “For three years, Alaskans have watched from the sidelines as competing jurisdictions eclipsed our state in terms of oil production and industry investment,” he said in a statement.

“The Senate has taken a bold action to increase production and fill the pipeline. I thank them for heeding the concerns of Alaskans, for understanding the urgent need for reform, and for acting in the interest of Alaska’s long-term prosperity,” Parnell said.

In a briefing following the vote, legislators acknowledged the risk they are taking.

“We’re taking a courageous step here, giving up benefits from tax revenues today to ensure we have revenues tomorrow to support public services, but we have to do this because we’re not competitive in the industry today,” state Sen. Anna Fairclough, Republican from Anchorage and one of the architects of SB 21, said in a briefing following the late-night vote.

“Alaska’s tax system is broken. It can be fixed but we all need to work together, and this is an important step along the way,” she said.

Sen. Cathy Giessel, another Anchorage Republican who helped develop the bill, said it includes a number of innovations. “We have something new, a Gross Revenue Exclusion that allows companies a 20 percent tax break on new oil they produce. They have to produce new oil to get the GRE,” Giessel said.

The Senate bill is being held one day on a procedural technicality, but committees in the House have scheduled hearings starting Friday on SB 21.

Parnell and Republican legislators have pushed for major changes in the Alaska oil tax for several years. Parnell argues the tax is too high and puts Alaska at a disadvantage in attracting industry investment. New oil development is booming in most parts of the world, but not Alaska, he has said.

Legislators are worried about the continued decline in production and falling TAPS throughput, which has been declining at 6 percent annually for several years and will average about 550,000 barrels per day this year.

The overall effect of the changes in the Senate-passed bill will be to reduce "total government take," or the share taken by government in taxes and royalties, to about 60 percent to 62 percent, according to modeling done by consultants to the Department of Revenue. The current tax law has total government take at about 74 percent.

The bill makes a number of changes from the existing law, mainly in jettisoning a controversial "progressivity" formula that hikes the tax rate, which is on industry net profits, as oil prices rise.

Major North Slope producers praised elimination of the progressivity formula. Dan Seckers, ExxonMobil's Alaska tax manager, told legislators in a Senate Finance Committee meeting late last week that the progressivity change alone was "a significant improvement."

However, Seckers and representatives of BP and ConocoPhillips told lawmakers they still thought the base tax rate in the new bill, 35% percent, was too high. "It still fails to move the bar," said Damian Bilbao, BP's vice president for finance for Alaska.

But Fairclough, listening to the producers, said the effective tax rate will be lower because of a new proposal in the bill: a $5/barrel production tax credit that will bring the actual tax rate down.

Barry Pullium, with Los Angeles-based EconOne, a consulting firm working for the Revenue Department, told the Senate Finance Committee before the bill passed that he estimated the production tax credit would lower the effective tax rate to 28 percent.

Pullium said he thought the major producers' remarks "are aimed mainly at trying to get a better deal."

Roger Marks, a retired state petroleum economist working for the Legislature, told the committee the tax changes put Alaska "in the middle of the pack instead of near the top" in comparisons of total tax take among major petroleum producing regions of the world.

Even a modest response from industry with new investment and production would more than offset the cost of the tax change to the state treasury over six years, Pullium told the senators.

Senators voting for the measure Wednesday night include Sens. Click Bishop, John Coghill, Mike Dunleavy, Fred Dyson, Anna Fairclough, Cathy Giessel, Charlie Huggins, Pete Kelly, Lesil McGuire and Peter Micciche.

Those voting against the bill include Senators Dennis Egan, Johnny Ellis, Hollis French, Berta Gardner, Lyman Hoffman, Donny Olson, Bert Stedman, Gary Stevens and Bill Wielechowski.

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