Sunday, December 29, 2013

Oil tax reform legislation the top story of 2013

The state Legislature action to revamp the state’s oil production tax in its 2013 session ranks as the top Alaska news story for the year. Senate Bill 21 will replace the current oil tax, called ACES, on Jan. 1.

The bill overhauls what had become an obsolete tax. There was wide agreement that ACES was “broken” but sharp disagreements in the Legislature over how to repair it. Generally, Gov. Sean Parnell and Republicans in the Legislature wanted a complete makeover, while Democrats leaned toward minor band-aids at most.

The makeover, in SB 21, involved major structural changes, however, and the Democrats and other critics howled.

After SB 21 passed and legislators went home last April critics organized a referendum drive to repeal the tax change. Sufficient signatures were gathered and the question will now appear on the August 2014 primary election ballot.

Basically, SB 21 makes two important changes and a number of smaller ones. Most important, it eliminates a “progressivity” formula in the ACES tax that ratchets up the tax rate as oil prices rise to high levels when prices reach $110 per barrel or above.

In those price ranges the effective oil tax rates in Alaska were some of the highest in the world. Alaska’s high costs, distance from markets and harsh climate conditions were challenges enough for industry, but the high tax rate made most new Alaska oil investments uneconomic under ACES.

Industry investment in new oil projects lagged, while it boomed in other U.S. states. Meanwhile, the decline in North Slope production continued at rates of 6 percent to 8 percent yearly.

SB 21 changed that structure. At the higher price ranges it would constitute a tax reduction for companies (at lower prices it works in reverse, raising taxes higher than ACES), but what’s most important is that SB 21 is simpler than ACES, which was so complicated companies could not predict its results in their planning for projects, which is very important.

Since last April, when the law change was made, the companies have stepped up with substantial new investments on the North Slope. About $4.5 billion in new projects are planned, and possibly more, which are expected to result in about 55,000 barrels of new oil production by 2018.

— Tim Bradner, Alaska Journal of Commerce