There is a good deal of speculation about whether Governor Palin will call a special session this fall to review the petroleum production tax (PPT) adopted by the legislature only last year. Earlier this year the governor announced her intent to call the session, but since then has said she is waiting for a review of the tax by the Department of Revenue (DOR) to see if there is good reason to call the legislature back.
Several thoughts crossed my mind as I have pondered this situation. The first, “Has the tax worked?” Although I am no expert on taxes, I think it is unfair to judge the “success” of this tax based on a single filing for the first nine months it was in effect. Since this is all the information DOR will have for its analysis, I will make mine on the same basis.
The state received over $900 million dollars in additional revenue from the new tax for nine months in 2006. If one extrapolates from this figure to estimate a full year’s tax take, it would seem the state can expect to receive between $1.2 and $1.3 billion dollars each year. This figure will vary based on a variety of factors, including the price of oil, total operating costs, and capital expenditures.
I believe it was appropriate for the legislature to have made some changes in the production tax last year, given the high price of oil. It seems to me that getting more than $1 billion dollars a year in new revenue from the industry that already pays over 80% of our state’s expenses is on the high side of reasonable. I see no need for a special session.
However, others see the situation differently. Some want to revisit the painful exercise the legislature went through last year, claiming the vote on PPT was “tainted” because several legislators have been indicted for taking bribes that might have influenced them to vote to reduce revenue collected from PPT.
It is important to keep in mind the oil industry and those who supported it worked for a tax rate of 20% or lower. The final legislation set a base rate of 22.5% and provided for the possibility of an additional tax as high as 47.5%.
Two points seem worthy of note here. First, if the vote was “tainted’ it would seem that over half of the legislature would have been bribed, and no one is making that kind of accusation. Second, if anyone was bribed to keep the tax at the lowest rate, they did not do a very good job.
Another reason some people support having a special session is they think the tax is not high enough. They base their argument on the fact DOR was expecting to collect $137 million more than actually was received and on a study they claim shows government take in Alaska is below the worldwide average.
It should come as no surprise that DOR had difficulty estimating the revenue from a complicated tax for which they had no experience. However, the main point to keep in mind here is that the state is already almost a billion dollars richer than it would have been without the tax.
The studies cited by those who believe we need to take $1.2 billion to $2 billion more from the oil industry have a couple of flaws. The first is that the figures are from 2004 and do not take into account the revenue from PPT. In addition, the studies do not consider the cost of development, and Alaska ranks among the costliest in the world for the industry.
Another argument used to promote a special session is that the state should not have changed to a net tax, but should have just raised the old gross tax. These individuals would use the special session to change the entire tax structure, only a year after the state had made another major change.
How many ways can one spell fiscal instability? Some of the newer companies operating on the North Slope have made their investment decisions based on the structure of the new tax.
Changing the structure of the production tax again, even if some of the new investment credits remain, sends a terrible signal to those who are or may be thinking about investing in Alaska. Worse yet, it sends an unfortunate message not only to the oil industry, but other industries as well.
My advice to Gov. Palin is to tread lightly here. She should wait to see what DOR has to say about the PPT. We need to give the new tax a chance to show what it can do, and any decent analysis of how it is functioning should probably take place over three years or more.
The one thing you can count on is that a special session will not lower the state’s current take from a production tax. The tax will only go up.
How much of an increase the industry can sustain may be open to debate. However, policy makers need to recognize that current North Slope production is steadily falling. I am a firm believer higher taxes will not lead to higher production, but will most likely have the opposite effect as Alaska ultimately loses the new investment dollars needed to stem the decline.
A special session which raises the production tax is a dangerous path that could lead us to the edge and over an economic cliff.