Resource Development Council

A Message From The President

John Shively


As a friend of mine who is on the other side of the PPT debate from me said the other day, “Here we go again.” For the third time in three years we are back debating how much we can tax the oil industry without doing longterm (and perhaps even shortterm) damage to our economic future.

Because the issue is so important and so contentious, RDC is devoting much of this issue of the Resource Review to the subject. Although I have many concerns with increasing production taxes again, I am going to address only two of them in this column.

The first concern is the idea that we need to set taxes as high as possible to gain our fair share because we are the owner of the resource. We hear this argument often from the “Tax to the Max” folks. Of course, tax policy is not based on ownership. If it were, the government would be able to tax our homes only if the government owned those homes.

In most places tax policy is set according to the needs of government, not according to how much the government can take. Many places, including a number of communities in Alaska, have limited the government’s ability to collect taxes by establishing a tax cap. Such caps have become an acceptable means of helping political leaders control governments’ seemingly unquenchable thirst for more money.

Taxes are usually increased when a government needs additional funds to run its operations. However, with Alaska’s upside down approach to tax policy, we have been steadily increasing taxes on the oil industry while the treasury has been collecting large surpluses. I guarantee you that if we were achieving such surpluses as a result of a personal income tax, the citizens would be demanding (and perhaps getting in a special session) a decrease in the tax rate.

I should also mention that I believe we achieve our share of the ownership of the oil through royalties, not through taxes. Those royalties are based on a percentage of the value of the oil so that they increase as the price of oil increases.

The second issue I want to address is one you have heard many times before from RDC and others in the business community – the absence of a state fiscal plan. If this matter were not so serious, it would be amusing to see how the “Tax to the Max” politicians get around this subject, particularly since in the past many of them have feigned support for a fiscal plan for Alaska.

Some of them say we need to get the money from the oil companies now so that we can save it for the future. I would ask, “Save for what? Save for when?” If we had a fiscal plan, the citizens would be able to answer these questions.

Lacking a fiscal plan, our only option is to look at the recent past to see whether the government is capable of saving surplus tax dollars, and the answer seems to be a resounding “No.” The large surpluses of the past few years have been blown through the way a fullspeed tractor trailer might speed through a small patch of fog.

Some of the more intellectually honest “Tax ‘em because we can” folks have a long list of items for which they would spend the new tax revenue. I would ask these enthusiastic big spenders, “Spend for how long? What happens when the money runs out?”

Absent a fiscal plan, there are no answers to these questions, and that is probably the most serious issue facing the state. I read recently that as Alaskans we enjoy the “lowest state and local tax burden as a percentage of personal income” in the nation (Alaska Economic Trends – September 2007). We achieve this lofty status without taking into account the Permanent Fund Dividend.

If our political leaders decide to base an everexpanding state budget almost solely on significant increases in taxes on oil production, the combination of the continuing decline in North Slope production and a dramatic decline in the price of oil would be disastrous.

Such a high budget/low production/low price scenario would quickly remove us from the top of the leasttaxed list I mentioned above and could easily send us into the kind of economic downward spiral Alaska experienced in the mid 1980s.

The special session of the legislature begins October 18th and could take one of two courses. The legislature can choose to take a shortterm economic view and concentrate solely on how much money they can take from the oil industry.

However, it is my hope that the legislature will take the longer view and address the very difficult subject of how today’s oil revenues fit into our fiscal future. It is unlikely that such a vital and complex subject can be dealt with in 30 days, and I see no reason to rush the judgment on this issue, given its importance to our future.