A representative from the Make Alaska Competitive coalition painted a bleak picture of Alaska’s economic future during a presentation to the Ketchikan Chamber of Commerce.
Bill Corbus said Alaska’s oil tax system must change to first stop dwindling oil revenue, and then, if all goes well, increase the flow in the TransAlaska Pipeline.
About 90 percent of the state’s budget comes from oil revenue, but the amount of oil traveling through the pipe now is significantly lower, and Corbus said it will continue to decline unless the state takes action.
Arguing for tax reform, he cites reduced unrestricted funds in the state budget — $9.5 billion in 2012, $7.5 billion this year, and $7 billion in the coming budget. On top of that, he said, certain required expenses, such as state health and retirement benefits, continue to get more expensive.
“If you’ve been paying attention to what’s going on in Washington, D.C., the outlook for federal support for programs in Alaska is not good,” he said. “So, if something isn’t done, we can be looking to a change in lifestyles, we Alaskans.”
Corbus has a list of services that could suffer cuts because of declining oil revenue, and it is a long one: The ferry system, education and revenue sharing, for example. In addition to that, he warns of possible state income or sales taxes to offset losses.
“On the municipal level, we can be looking for possibly higher mill rates, higher sales taxes,” he said. “So, at this juncture, the future doesn’t look particularly rosy.”
Corbus said the current oil tax system is “onerous,” and because of that, oil companies are choosing to invest elsewhere. He has a graph showing that combined state and federal taxes that oil companies pay in Alaska make the government “take” higher than most of the competition, especially when oil prices are higher.
“The gulf of Mexico, government take of 50 percent; North Dakota, 63 percent; Alberta, 60 percent; and Texas is somewhere in there. Anyhow, they range between 50 and 63 percent. Whereas, we in Alaska are 70 to 73 percent,” he said.
The current state oil tax is called ACES, which stands for Alaska’s Clear and Equitable Share. It includes a “progressivity” clause, which increases Alaska’s tax when the price of oil is high.
“That progressivity factor is the killer and it’s the thing that makes us not competitive.,” Corbus said.
After his first proposal to change the oil tax structure failed in the Senate last session, Gov. Sean Parnell introduced a new proposal this year. Parnell’s bill had a 25 percent across-the-board tax, and provided some tax credits for investment, but only if those investments result in oil production.
The Senate approved the bill, but only after it increased the flat tax to 35 percent and added a $5 per barrel production fee. Nine senators still opposed the bill, including Sitka Republican Bert Stedman.
Stedman agrees that ACES needs modification, especially when the price of oil is high. He said the bill that made it through the Senate makes some needed adjustments to Alaska’s oil taxes, but it gives too much away.
“It would move $1.7 billion — that’s $1.7 billion — over to the industry side of the table. That’s the part of the bill that I find troubling,” he said. “You don’t have to move that magnitude of cash across the table in areas that are already economic. In my opinion, it’s self-induced financial suicide to the state.”
Stedman adds that previous arguments in favor of drastic changes to the oil tax structure – such as no employment growth on the North Slope — have proven to be “red herrings.”
“And now, one of the current red herrings is that we’re not competitive against North Dakota and Texas,” he said. “Well, North Dakota and Texas are being driven by this shale oil revolution, which was triggered by the technology and breakthroughs in shale oil development – hydraulic fracking. It has little to nothing to do with the oil tax structure in Texas and North Dakota.”
Corbus admits that the proposal hasn’t been universally embraced. A critique he’s heard is that there is no guarantee that making these changes will lead to increased production.
That’s one of Stedman’s concerns.
“There is no commitment, in fact, no detailed discussion and plans laying out of how oil production is going to increase regardless of the magnitude of the tax change,” Stedman said. “One of my colleagues even called it a crap shoot. And I think he’s pretty close to being right, and he happened to be one of the guys who voted for the bill. I don’t think we should be playing craps with the state treasury.”
Corbus said it’s true that the oil companies won’t commit.
“I regret to report to you that we have not been able to, nor has any state government around the world, been able to get an oil company to agree in writing,” he said. “We’re not going to get that.”
But, he said, those companies have invested millions of dollars into the state, and they aren’t going to just walk away. Corbus said those companies like geographic diversity, so oil production in Alaska in addition to other locations appeals to them.
Another argument against the bill is that it could mean $4.8 billion less revenue through 2019. Corbus said Alaska will just have to get a grip on spending levels until production ramps up, thus eventually increasing state revenue.
“I would submit that if we want to experience the prosperity we have experienced over the years, we have to but the bullet. If we wait, the longer we wait, the more painful it will be,” he said.
An audience member asked whether there were any revenue projections after the initial decrease. Corbus said there are not.
The House version of the oil tax bill is going through the House Finance Committee. Public testimony on the bill was scheduled to be heard at 5 p.m. Tuesday. Once it makes it through the committee process, it will be considered on the House floor.