Action Alert:
Petroleum Production Tax
Overview:
The House Finance Committee is working on a committee substitute that would reduce the Petroleum Production Tax (PPT) to the 20% rate originally proposed by the governor. The substitute would increase the trigger price for a windfall profits tax to $45 per barrel after costs (for ANS crude deliveries to the West Coast), and nearly double the rate of progressivity to 0.175%. At current prices, the PPT rate under the new committee substitute would be approximately 22%.
The committee is expected to complete its work on the bill and have it to the full House by Saturday. More amendments and a vote is expected Sunday and a reconsideration vote may occur on Monday. Once the bill reaches the House floor, more amendments are likely, including ones that would increase the tax and progressivity rates and reduce the trigger price for the windfall profits tax. When the House passes the bill, it will move to the Senate for concurrence. If the Senate concurs, the bill will go to the governor for his signature. If the Senate doesn’t, a conference committee will be appointed to work out a compromise, leading to yet another vote in both bodies. Deadline for the special session is midnight Thursday, June 8. If adopted, the new PPT will be incorporated into the draft gas pipeline fiscal contract.
Action Requested:
Immediately fax or email the House Finance Committee and your legislator. Let each committee member know the tax rate is too high to encourage long-term investment. Urge them to create a system that gives Alaska a competitive advantage for capital investment. This unprecedented tax hike comes at a time when the State of Alaska is already experiencing significant surplus revenues due to high oil prices.
The Legislature’s systematic changes to the Governor’s original bill could ultimately have profound impacts on long-term investments, corresponding production and state revenue. We fear higher tax rates will serve as a roadblock to capital investment and will leave valuable resources in the ground. Urge them to cut the rates!
Petroleum Production Tax Comment Points
- The Legislature is moving in the wrong direction with the Governor’s proposed petroleum production tax. The current bill emphasizes short-term revenues at the expense of the long-term investment required to slow the decline in production.
- If the Legislature overreaches in its tax take, the ramifications could be severe, especially considering a doubling of current investment by industry is required to meet the state’s most recent oil production and revenue forecasts for the next decade. If that investment is not made in our oil fields, actual production and revenue ten years out from now could be half of what the state is now forecasting.
- The tax regime ultimately approved by the Legislature will directly impact how attractive Alaska is for investment, and that in turn will have a direct impact on declining production. It is in the best interest of Alaska to focus on production – growing the pie – rather than increasing the state take from a more sharply declining production curve. Greater investment means higher production, which results in increased revenues to Alaska.
- The proposed progressive tax rate will discourage investment in Alaska oil fields, given the challenged resource base, a high cost environment, and distance to market.
- If enacted, the current bill will leave Alaska with the highest cost structure in the United States, when total government take (federal, state local) and operating costs are factored into the equation, putting Alaska at a competitive disadvantage for new investment.
- Lower rates would improve Alaska’s competitive position for attracting capital, increase production, generate new jobs for Alaskans, elevate state revenues, expand the private sector and extend the life of the oil industry in Alaska. Higher rates would do the opposite over the long term.
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