Legislature opens, oil tax questionable

JUNEAU -- The 2011 session of the Alaska Legislature began Tuesday with senators saying Gov. Sean Parnell's proposal to slash oil taxes could have a hard time getting passed before lawmakers go home.

"I've heard a lot of pushback among legislators just from chatting in the hallway about it," said Senate President Gary Stevens, a Republican from Kodiak. "It's going to be a hard sell."

Parnell is asking the Legislature to agree to cut taxes by an estimated $5 billion between 2013 and 2017. It's an issue likely to dominate while the Legislature is in session for the next three months.

Parnell and top Republicans in the state House describe the profits tax as a job killer. But key senators are not convinced, and say they need to get more information about the impact of the oil tax system imposed under Gov. Sarah Palin in 2007.

Particularly contentious could be the Republican Parnell's plan to lower the base production tax rate from 25 percent to 15 percent for new oil fields. It's a piece of his broader effort to lower taxes.

"The chance of it going to 15 (percent) is slim," said Sitka Republican Sen. Bert Stedman, who is co-chair of the Senate Finance Committee.

Parnell said the oil industry and its supporters are going to have to make the case. "In order for this legislation to pass and get traction in Juneau, Alaskans, business owners, employees are going to need to step to the table and speak to the jobs that are going to be created," the governor said.

BLUNTING INVESTMENT?

The state Revenue Department on Tuesday released a report on how the tax was working. It was inconclusive on whether it should be lowered.

"Based on the multiple changes to the tax laws over the past few years, drawing any conclusion about their effect on Alaska's investment climate is difficult," the report concluded. "However, what is clear is that production continues to decline. The state should continue to monitor its competitiveness with other oil and gas jurisdictions worldwide and be prepared to change its tax structure as needed."

Stevens said the Senate will look closely at changing the oil tax. But he said making a final decision could take longer than the 90 days the Legislature is scheduled to be in session for the year.

"We've got a lot of material to gather on how we stack up to the other oil producing nations and states. And trying to gather that information and to see: Are we as high priced as the oil companies say we are?" said Stevens, the Senate president.

Stevens said the oil tax issue might not be resolved until next year, unless there is a special session, and "no one wants to even think about that."

Stedman said senators are going to look at work by energy consultants Wood Mackenzie and the Van Meurs Corp. on how Alaska compares to over 100 other oil basins around the world.

"I think you'll see a lot of review on that, of where Alaska is actually positioned. And then there will obviously be a discussion on taxes," he said.

MORE COMPANIES, LESS EXPLORING

Much of the complaint about the profits tax is how it rises from the base rate of 25 percent when oil prices go up. The Revenue Department said the tax is about 33 percent when oil is at $75 a barrel. Parnell wants to change how the curve works.

The Revenue Department report released on Tuesday said investment by the oil industry has risen each year since the tax system was imposed in 2007. But "it is unclear how much of the capital expenditures were drilling ... and how much were maintenance." Opponents of Alaska's tax say the industry is putting money into maintenance but not investing in increasing the oil flow.

The report said "the number of companies filing annual tax returns doubled between 2006 and 2009, indicating interest by companies that are either new or returning to the Alaska oil and gas industry."

Oil exploration in Alaska, however, dropped off in 2010.

The report noted that oil industry employment in Alaska rose after the tax passed in 2007, but that the number of jobs has been on the downslide.

Taxes are just one factor the oil companies use when deciding where to invest, the report said. It concluded the global recession and wild oil price swings the past three years make it hard to judge what impact the oil tax has had on investment.

The Department of Revenue acknowledged opponents of the tax, saying criticism is often centered around the marginal tax rate at extremely high oil prices, when "the government share of each additional dollar of profit may be as high as 93%."
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