Bradners'

Alaska Legislative Digest

October 19, 2007     

Oil and Gas Bulletin

Comments? E-mail: timbradner@pobox.alaska.net

Legislature goes to work on Palin’s bill to change oil, gas taxes 

Legislators began work in special session in Juneau today, and are scheduled to hear the state administration’s pitch for changes to the petroleum production tax in briefings today and through the weekend. Even before the session formally gaveled to order Thursday evening the Legislative Budget and Audit Committee had already completed more than six hours of hearings with consultants Pedro Van Meurs and Daniel Johnston. They were brought to Juneau by the committee to compare the current Petroleum Profits Tax (PPT) to similar oil provinces around the world and also discuss Gov. Palin's ACES (Alaska's Clear and Equitable Share) proposal.

Before either spoke, however, Sen. Johnny Ellis (D-Anch.) criticized Van Meurs for supporting, in public, a 20 percent tax rate that was part of Gov. Frank Murkowski's original PPT proposal while privately advocating a 25 percent rate in his advice to the former governor. Ellis complained Van Meurs "intentionally misled" the Legislature by not revealing his true opinions on the PPT (the rate was finally set at 22.5 percent). Van Meurs responded that his support for the higher tax rate was stated in memos published during last year’s debate over the PPT.

Van Meurs advises against Palin’s proposal, saying change is too soon

In his presentation Van Meurs said the Legislature should wait for the 2011 review of PPT that is required in existing law before making major amendments. He did support, however, provisions proposed by Palin that relate to strengthening the Department of Revenue’s auditing capabilities and increasing transparency of tax administration. He warned making a major change one year after adopting the PPT puts Alaska at risk of being viewed as unstable in fiscal terms. Waiting until 2011 would give lawmakers real data on PPT revenues and cost deductions, which may prove to be more accurate than the Palin administration's estimate of an $800 million “shortfall” from the PPT.

Van Meurs said elimination of the transitional investment credits is another good step, but said he is "extremely negative" on most of the rest of ACES. He criticized Palin's shift in the PPT progressivity trigger from $40 to $30 per barrel as a "band aid solution" and criticized the addition of a gross revenues tax for two large producing fields as  “political" price floor.

Van Meurs also dropped in a warning that the proposed North Slope gas pipeline is "in deep trouble" and may no longer be financially viable due to lower long-term gas prices and a doubling of costs over 2001 estimates due to increases in the cost of labor and steel. Van Meurs was the former state administration’s chief advisor on natural gas pipeline negotiations with North Slope producers, but he was also an advisor to former Gov. Tony Knowles. He began working with the state in 1998.

Consultant Daniel Johnston, in a rambling, extemporaneous presentation, maintained his views from last year that Alaska's oil taxes are not out of line with world norms.

FRIDAY SCHEDULE IN JUNEAU 

9 a.m.

• Senate Resources Committee: administration presents ACES.
• House Republican majority news conference.

10 a.m.

• House Democrat minority news conference

1:30 p.m.

• House Special Committee on Oil & Gas: administration presents ACES.

A quick primer on PPT and Palin’s proposal:

• In 2006 the Legislature changed the state oil and gas production tax from a tax on gross revenues to a tax on net revenues, the Petroleum Profits Tax, or PPT. The tax is not a true profits tax, however, because not all costs are allowed as deductions.
• The major argument for the net profits tax was that it automatically adjusts the tax for high-cost projects like heavy oil without the need of a special incentive formula like the Economic Limit Factor, an incentive that as part of the previous gross revenues tax.
• Gov. Palin argues the new PPT is not living up to expectations and has proposed changes to increase the rate of tax from 22.5 percent to 25 percent and have a “progressivity” index, that increases the tax rate at higher oil prices, apply earlier. The governor also proposes a 10 percent gross revenues tax on two large producing fields.
• The effect of the governor’s proposal is to increase tax revenues by $700 million per year at $70 oil/barrel prices and $900 million per year at $80/barrel oil prices. These estimates are from Department of Revenue data released Sept. 4.

Legislative Digest is a paid-for private subscription service. Our special session Bulletin is distributed free as a public service, and is supported by special grants from a group of subscribers. Editors: Mike and Tim Bradner. Contributing writer: Bob Tkacz.  Interested in getting the regular Legislative Digest and Alaska Economic Report? Contact: mbradner@GCI.net or fax at: (907) 522-1761.