Bradners'

Alaska Legislative Digest

November 14, 2007     

Oil and Gas Bulletin

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

House and Senate in extreme state of flux over oil tax bill

The Senate Finance Committee is struggling to craft its much-anticipated committee substitute for the new oil tax legislation. The committee is to meet at 9.m. today to review a proposed bill that incorporates several new features. Meanwhile, in a Tuesday press conference the House minority Democrats drew a “line in the sand” to protect key elements they secured in the House bill passed Nov. 11, mainly a “standard deduction” for large field operating costs. Given all this, legislators on both sides of the aisle and in both houses are in a state of political flux.

Details of the Senate proposal won’t be known until the draft bill is released this morning but its key terms and fiscal impacts are known from a presentation by consultant Barry Pulliam, of Econ One, to the Senate committee yesterday afternoon. Pulliam, hired by the Legislature, was asked to model major tax terms in the bill. The key elements are a 22.5 percent tax rate and a progressivity formula that “stair steps” so that it has different effects at different oil price intervals. The basic idea is to have more modest tax effect at low prices and a larger effect as prices increase. This is different than the progressivity curves in the existing Petroleum Profits Tax or proposals by the administration and the House-passed bill.

The bottom line, Puliam told the Senate committee, is that at an assumed average West Coast price of $80 per barrel for North Slope oil (in real 2008 dollars) the Senate bill would net the state about $1.6 billion per year over current production tax revenues averaged through fiscal years 2008 to 2014. The House-passed bill, in comparison, would bring in $1.32 billion average over that same period, compared with the current tax. Gov. Palin’s original bill would net the state $611 million, according to the analysis by Econ One. The effect of the progressivity formulas, however, can be seen in a dramatic increase in revenues between the state’s fall 2007 official forecast price of about $62/barrel average between 2008 and 2014. In this scenario, the Senate bill brings $629 million over current revenues, slightly under the House bill, at $674 million over current income. The governor’s bill would bring in $577 million per year, using the official state forecast. Pulliam included the state’s latest downward revised estimate for oil production in his modeling. Estimates by Econ One and the Department of Revenue are done differently and may have different results. The department has not done an estimate for the pending Senate bill.

Industry expected to be blunt today in comments on new tax proposals

The petroleum industry is in a state of shock over rising tax costs in the new proposals and other provisions of the bills, such as very punitive penalties sections that can indirectly add hugely to costs. The “standard deduction” (freeze on operating cost deductions) for the large fields will also negatively affect heavy oil projects that are located in those fields, the companies will say. Comments from industry will come today before Senate Finance Committee. Remarks are expected to be blunt.

House members work to get Senate’s support for their version of tax

In the House, Sunday’s floor session exposed the fluidity (and uncertainty) of support for the tax bill as amendments attracted support, and opposition, from members of differing political and philosophical persuasions, depending on the issue. It was the combination of those elements that attracted the 26 “yea” votes and passed the bill. Supporters of the House version are working diligently to maintain support for key elements of their bill. House leaders believe a final bill that does not include the House version of progressivity, a 25 net profits tax and the “standard deduction” (fixed operations costs) provision would not garner enough votes to pass the House.

And there’s the rub because in the Senate it is known that the Finance Committee substitute will be substantially different from the House version and include a completely rewritten progressivity section and a 22.5 percent tax rate compared with the House rate of 25 percent. House members are also concerned that the “standard deduction” provision will not be in the Senate Finance bill. Many in the House consider this nonnegotiable. Meanwhile, reports are that four of the five Democrats on Senate Finance have agreed to support that committee’s new substitute. However, four of five minority Republicans have indicated support for the House bill. This could set up a Senate floor fight the likes of which we haven’t seen in a while. A comment we heard in the capitol hallways: “This fight is about power, pride and public relations rights,” in claiming victory with a simple number, like the overall tax rate.

This all may be mute. Senate Finance has yet to work on its bill. This means, given the Friday midnight deadline for ending the session, the House could be faced with a take-it-or-leave it proposition, one unlikely to be agreed to. The Friday midnight deadline means there is now little time for a conference committee, formed of members of both houses, to work out an acceptable compromise. The Governor, who has indicated support for the House bill, said late Tuesday that if the Legislature did not come up with an acceptable bill by the Friday deadline she would call another special session. There is confusion as to how quickly a new special session can begin. The governor’s comments indicate she thought legislators could be held through Saturday but the constitution, and state statutes, say 15 days’ notice must be given. This means a new session could begin Dec. 2. House Speaker Harris said that if a second special session is necessary he wants to give his members time off so they could spend Thanksgiving with their families.

• Senate Finance Committee: 9 a.m. Wednesday
• Senate floor session: 4 p.m. Wednesday
• House floor session: 10 a.m. Thursday

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.