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Drilling down on proposed tax cut for Alaska oil companies

Pat Forgey

Changes made last week to Alaska Gov. Sean Parnell's oil tax cut bill could increase the cost to the state by more than a billion dollars over the next six years, the state Department of Revenue said Saturday. The announcement came on the same day that the state Senate passed a capital budget of about $1.9 billion, which was about $1 billion less than the previous year's.

“We felt it was extremely important to address the forecasted decline in state revenue due to the decline in oil production. Times have changed. We don’t have the surplus we used to,” Sen. Kevin Meyer said in announcing the capital budget, and making no mention of the projected increased costs to the state that would result from passage of the most recent oil tax cut proposal.

The capital budget will still have to go through the House, where other projects will likely be added and subtracted, so the $1.9 billion budget could change significantly by the end of the session.

The biggest single change to the oil tax bill was the reduction of the base tax rate from 35 percent to 33 percent, an action taken by the House Resources Committee before sending Senate Bill 21 on to the House Finance Committee, where it is now under consideration.

Total cost of the bill is now estimated at between $5.7 and $6 billion over the next six years, according to the Revenue Department.

House Resources Committee Co-chair Eric Feige, R-Chickaloon, said that if Alaska took $1 billion less in taxes from oil companies, that money would all be reinvested in Alaska.

"If we take a billion dollars less, that's a billion dollars more that gets circulated in the Alaska economy," Feige said Friday.

Those dollars then get multiplied on a 9-1 basis as they circulate in the economy, meaning that there will be an additional $9 billion circulating in the Alaska economy, Feige said he'd been told by economists.

That's not the way it works, said Rep. Chris Tuck, D-Anchorage, also a member of the House Resources Committee.

First, because the tax cut is to oil companies' profits, they'll have to pay income tax on that money. The federal corporate income tax rate is 35 percent, though companies had varying effective tax rates. Therefore, a billion dollar tax cut would leave companies with only $650 million available to be invested in Alaska, in theory, if they choose to do so.

That's why Alaska adopted the current ACES oil tax in 2007, Tuck said, because the companies then weren't reinvesting in Alaska.

"If they are going to take their profits Outside, we are going to reap those profits as well. But if they reinvest, they can significantly buy down their tax burden," Tuck said.

If the companies don't reinvest in Alaska, then their taxes go up and that money gets invested in Alaska anyway, he said.

"One of the best ways of keeping money in Alaska is making sure we have capital projects in new areas -- dams, power generation, transmission lines -- making it easier for Alaskans to live and making it attractive to new industries," he said. "That's keeping the money in Alaska as well."

The reduced tax rate might not prevent companies from investing in newly discovered fields elsehwere, or keep them from using newly developed technologies to produce oil outside Alaska, he said.

The amount of the tax cut per year varies, ranging from $680 million to about $1.1 billion over the next six years, according to the Revenue Department's estimates. The reduced tax rate in the House Resources Committee would result in a decrease in tax collections of between $1.1 and $1.2 billion over the six years.

Those estimates are based in expected prices and anticipated production levels over the next six years, but they have not been updated with data from the Revenue Sources Book projections that were released Friday. Any changes would not likely be significant.

The battle over the value and effectiveness of using taxes to spur investment resumed with debate on Senate Bill 21 Saturday in the House Finance Committee Saturday.

The Department of Revenue's Mike Pawlowski said he believed that the cuts would result in an even larger amount than the cut being invested by the companies in Alaska.

"We want them to see Alaska as a destination for investment where more than they are earning comes into the state and we start growing again," he told the committee.

He acknowledged to Rep. Les Gara, D-Anchorage, that that was a hope, and there was no requirement in Senate Bill 21 that those investments actually get made.

Rep. Tammie Wilson, R-North Pole, said she didn't like telling companies what to do, and that companies in other industries, such as mining or retail, were under no such requirement.

"When we do corporate taxation, there's no requirement that we have that certain amounts of money are spent in the state," she said.

Contact Pat Forgey at pat(at)alaskadispatch.com