Governor Murkowski’s Proposed Petroleum Production Tax Comment Letter

February 24, 2006

Re: Governor Murkowski’s Proposed Petroleum Production Tax

Dear Senator Wagoner and Representative Samuels:

On behalf of the Resource Development Council for Alaska, Inc. (RDC), I am writing to provide our initial comments regarding Governor Murkowski’s proposed petroleum production tax as articulated in House Bill 488 and Senate Bill 305.

RDC is a private, non-profit business association comprised of individuals and leading companies from Alaska’s oil and gas, mining, forest products, fisheries and tourism industries.  The association’s membership also includes construction companies, local communities, Native corporations, organized labor and a wide range of industry-support firms.  RDC works to grow Alaska’s economy through the responsible development of the state’s natural resources.

Having had only four days to review this complicated piece of legislation, RDC is not yet prepared to offer detailed feedback on its technical provisions.  However, we intend to participate in the ongoing legislative process and to offer more thorough remarks upon further analysis and consultation with our most affected members.  At this time, RDC has two major concerns regarding the legislation.

First, the Governor’s proposal targets the one industry already responsible for providing nearly 90 percent of Alaska’s general fund revenues.  It would annually take an additional $1 billion from the oil and gas industry at current prices.  How will the Legislature manage this new windfall going forward?  This industry-specific tax proposal comes at a time when the state is wrestling with the question of how best to manage an estimated $1.5 billion revenue surplus under the current tax system.

RDC — in cooperation with a host of other business, community and social service organizations — has advocated the development of a long-term state fiscal plan for nearly a decade.  During this period we have argued the state must do more to bring recurring revenues in line with expenditures in order to achieve tax stability and create a positive and predictable business climate.  How the state manages surplus revenues is as important as managing deficits when it comes to accomplishing these policy goals.

It seems clear the proposed petroleum production tax will generate additional revenue at high oil prices.  However, it does not necessarily make Alaska’s revenue stream from oil more predictable or stable.  In fact, under the proposed progressive system the state is assuming certain risks.  Given these facts, how will the Legislature address periods of low prices without further penalizing the state’s largest revenue-producing industry?

Secondly, how will this increased tax burden affect future investment and exploration in Alaska’s oil patch?  Maintaining significant production throughput in TAPS is paramount to the future health of both the industry and the state’s general fund coffers.  It is not clear to RDC at this stage that increasing the state’s take by $1 billion annually facilitates new investment in the Alaska economy.

If the Legislature moves forward with a new oil tax regime, it must focus on providing incentives for both new frontier exploration and increased investment in existing fields and known resources such as heavy oil.  Without ongoing capital infusions, Alaska risks an accelerated decline in production flowing through TAPS.  In addition to incorporating proper investment incentives, the Legislature must analyze whether a new tax regime places Alaska at a competitive disadvantage for capital investment.  Ideally the Legislature will utilize the state’s tax regime to create competitive advantages for investment.

RDC’s membership is always concerned when new industry taxes are proposed.  The petroleum production tax is a proposal with massive potential consequences to the long-term wellbeing of Alaska’s largest industry and the health of the state’s general fund.  We urge the Legislature to carefully analyze House Bill 488 and Senate Bill 305 and we look forward to participating in the public dialogue on this issue.  Thank you for your attention to the Governor’s proposal and for your consideration of RDC’s position on House Bill 488 and Senate Bill 305.

Sincerely,

RESOURCE DEVELOPMENT COUNCIL
For Alaska, Inc.