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How Parnell's flip-flop could be worth billions to Big Oil

Alex DeMarban
Speaking in Fairbanks in February, Gov. Sean Parnell made it sound like his administration had only recently learned that tax credits, designed to spur oil production on state lands, weren't working. Stephen Nowers photo

Alaska Gov. Sean Parnell has radically altered his view of the state's oil tax regime, going from a supporter to an increasingly staunch critic who began seeking major changes after he was elected in late 2010.

Parnell has flip-flopped on progressivity, the key element in the current tax regime that raises the tax on oil companies as the price of crude, and the companies' potential profits, rise. In early 2010, Parnell said he wouldn’t change progressivity. But after winning election that fall, he sought to cap it in a bill that would cost Alaska more than $1.5 billion a year. Now he wants it done away with altogether.

Parnell's about-facing has continued in another area. He has abandoned support for the capital-expenditure tax credits paid to oil companies, a program he once favored. He now proposes eliminating the tax credit. That would reduce the massive hit to the state from removing progressivity in the tax structure, but critics say it would also remove a key incentive for new investment in Alaska’s dwindling oil patch.

These U-turns raise doubts about whether Parnell's measure to cut taxes for Alaska's dominant industry -- one that is already extremely profitable -- will perform as promised, meaning reverse the state's declining oil production. The flip-flopping also makes one wonder how much anyone truly understands the current, complicated tax system, which has not been audited in nearly five years.

Business cheerleaders have been reeling for a few years now as oil production has jumped in states like North Dakota while Alaska -- once the big dog in American oil -- has fallen behind in the rankings. Parnell, a Republican and former oil lobbyist himself, has made bold statements that Alaska can reverse this trend by slashing taxes on Big Oil.

For Alaskans, who pay no personal state income or sales taxes, the health of Alaska's oil industry dictates the future of their economy. If tax cuts don't spur new oil production, then they might be left picking up budget shortfalls in state government in the years to come. Meantime, the Alaska economy remains undiversified. Oil radically dominates the state, and Alaskans are depending on Parnell and lawmakers in Juneau to make the right decisions in their policy dealings with some of the largest companies in the world.

Drill, baby, drill

Earlier this year, Parnell introduced his latest attempt, Senate Bill 21, a measure cutting taxes for oil companies to the tune of $900 million a year, averaged out over six years. The giant North Slope producers -- BP, ConocoPhillips and Exxon Mobil Corp. -- would likely benefit the most from his proposed policy shift.

Parnell promises the extra money the oil companies get from the tax break will encourage them to invest more in the North Slope oil patch, thus creating jobs and boosting oil production.

There is no guarantee they'll do so, but Parnell says the give-back to industry will help Alaska look more attractive compared to other oil provinces.

Parnell's reversals have sometimes been stark. He initially supported the 2007 tax system championed under then-Gov. Sarah Palin while serving as her lieutenant governor.

After Palin abruptly resigned in 2009, Parnell served out her term. During that time, he started to suggest merely tweaking the tax structure by increasing tax credits to give back more to oil companies. He said increased tax credits would create hundreds of new jobs. Parnell at the time reasoned he wouldn’t return money to oil companies because they would it invest somewhere else in the world -- not in Alaska.

But after he was elected governor in November 2010, Parnell began to pursue major changes to the Palin-era tax system.

Today, Parnell wants the whole thing thrown out.

The changes he proposes could be monumental for Alaska, where oil is the lifeblood that funds 70 percent of the state budget and supports roughly one-third of all jobs. But despite three years of attempts to alter the system, and millions of dollars spent on consultants and staff expertise, the big unknown hasn't changed:

How will oil companies spend the money they save in taxes should the state system be overhauled?

No guarantees

Will that money stay on the North Slope, as Parnell now claims? Or will companies use their riches from Alaska to boost development in less expensive oil regions?

The oil producers are refusing to make promises, despite urging from lawmakers.

Some things are known. If Parnell's bill passes, it will blast a hole in the state budget at current spending levels, at least in the short-term and possibly for years to come. Lawmakers will soon be forced to cut spending or draw hundreds of millions of dollars yearly from savings accounts.

The state has managed to stockpile $16 billion, thanks to the current tax system. But Alaska's already on the hook for much of that, given the $11 billion in future payments owed as part of the "unfunded liability," including the amount the state must pay thousands of public employees with pension plans.

Assuming oil prices remain around $110, and production continues falling slightly each year, Alaska can expect to lose more than $6 billion over the next six years, according to the latest version of Senate Bill 21 modified by Senate committees.

Those estimates are laden with guesswork, so there's no telling the real costs. Throw in unnervingly low oil production and a lack of promising prospects on the horizon, and a state that escaped the global recession suddenly seems to be neck-deep in trouble with just minutes left in the game.

Is that why the governor's tossing up another Hail Mary pass, his fourth attempt in three years? Or is there another reason? Either way, he's throwing the old playbook out the window.

A new narrative?

Here's what Parnell told the Petroleum News three years ago, referring to oil companies and altering the tax system: “I’m not interested in changing progressivity so they can take that money and invest it somewhere else. If they’re willing to invest it here, I’m open to considering it, but I’m standing up for Alaskans in this, not some other country.”

A year later, Parnell had veered from that view with a proposed measure that would cap progressivity and cost Alaska more than $1.5 billion a year. Parnell's current proposal would cost Alaska less, but it still offers no guarantees the money will stay in the state's oil patch.

With a new Republican majority in the Alaska Senate, one that seems more favorable to cutting taxes and reducing government services, it looks like Parnell's fourth try will be his charm.

Parnell proposes doing away with progressivity, the part of the current system he once said he would not change. The other key part of his measure, to eliminate tax credits, is guesstimated to save the state more than $3 billion in the next six years.

In the past, Parnell wanted to boost tax credits. Just last April in a special legislative session he'd called, he wanted the state to reimburse oil well-head expenditures by 40 percent, increasing the amount handed out in credits.

Now, Parnell has created a new narrative. He says the capital-expenditure tax credits are not working because they are not leading to new oil.

Instead, Parnell has suggested giving oil companies a 20 percent break on any new oil discovered, what's called the Gross Revenue Exclusion. The Senate has kept that change and also continues to support eliminating the tax credits.

The end result of eliminating the captial-expenditure credits, critics say, will be that smaller companies carrying out most of the exploration in Alaska in recent years will lose access to a subsidy that helped them with financing throughout the life of a project.

State Rep. Les Gara, D-Anchorage, has sent a letter asking for Parnell to explain why he initially supported the current tax regime and the capital tax credits, and why he's "reversed course." Parnell hasn't answered, according to Gara, who's been tracking Parnell's shifting views in recent months and years.

Gara said he doesn't understand why Parnell has gone from believing that global oil giants will invest a tax windfall outside Alaska to now believing they'll put more money into Alaska, should the governor's proposal become law.  

"If you want to never have good schools in Alaska again, or never treat people with mental illness, just give oil companies a $1.5 billion tax break," Gara said.

Speaking in Fairbanks in February, Parnell made it sound like his administration had only recently learned the tax credits weren't working. The credits should be eliminated because they put Alaska's treasury at risk, Parnell warned during his Fairbanks appearance, adding:

"This is something that we have started to communicate more fully as we've come to understand the distortion that the tax credits, particularly the capital tax credits, create for Alaskans."

Why the administration didn't know this before, Parnell didn’t say.

Contact Alex DeMarban at alex(at)alaskadispatch.com