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Parnell's math lowers pain of oil-tax cut by hundreds of millions

Alex DeMarban

Alaska Gov. Sean Parnell may have the political numbers to pass a proposed tax cut for oil companies, but is he sure how much the cuts will impact the state budget?

Parnell has been advocating for an overhaul to the state’s tax and credit program for the oil industry, which funds the majority of the budget. By cutting taxes, Parnell argues, oil companies will have more incentive to step up oil production.

But while production would ramp up, the state would see less revenue from its oil taxes as result of the cuts. And those shortfalls could deal a fiscal blow to the state, critics claim.

Just how much the cuts would impact the budget is a moving target, and Parnell and his administration give conflicting numbers when trying to answer the question.

In a fiscal analysis accompanying Parnell's bill before the Alaska Legislature, the math gurus at the state Department of Revenue say the tax cut would cost the state an average of $700 million annually for the next three years, assuming no new oil production comes online. The tax cut would cost the state $900 million next year alone.

The governor has different numbers. He's recently claimed the annual cost will be as low as $400 million starting next year, a figure that also apparently assumes no new oil production.

Speaking at a press conference earlier this month, Parnell was quoted saying, “We can manage a hit to the treasury of about $500 million that’s related to the lower tax rate for the next year or two or three while new production comes online."

On Feb. 13, Parnell lowered the damage his bill might cause even further. Addressing the Fairbanks Chamber of Commerce, he said the cost of his proposal has been "distorted." By who, he didn't say. Then he launched into a breakdown.

"The (fiscal note) impact shows $900 million less revenue at current oil prices in the first year, but guess what, $400 million of that's the tax credits we're still obligated from the current system," he’s heard saying in a video of the speech on his Facebook page. "So it's roughly $400 (million) to $500 million of foregone revenue in the next year. It's about $400 million to $500 million in the next year after that. And you see kind of the progression."

In the fiscal note, Parnell's administration has already factored in the tax credits he says are missing. So what is he talking about?

Also, that progression is much worse than Parnell implies. The fiscal note says that in the second year, the cost falls to $550 million. (At least the governor's in the ballpark on that one.) But the cost rises quickly, to $800 million in year three and $1 billion each of the following three years. Over six years, the average cost is $900 million.

So, is there a new fiscal note the public doesn't know about? Nope. The one before the Legislature is the same as before and can be found here.

Is it possible Parnell thinks crude prices will rise beyond projections, reducing the bill's damage to the treasury? As for production, it doesn't appear Parnell expects that to rise for a few years. If or when it does, that will also lower the bill's impact.

Sharon Leighow, Parnell's spokeswoman, provided this short explanation in an email: "The fiscal impact of the bill depends on price, spending and production."

So what scenarios is Parnell planning for? It's an important question. His bill could gut the state budget, affecting Alaskans for years. If the outlook has suddenly grown rosier, shouldn't he let us know how?

Requests to speak with Parnell were denied. But deputy commissioners tried fielding the question. Alaska Deputy Revenue Commissioner Bruce Tangeman was read Parnell's Feb. 13 statement over the phone. He couldn't say how Parnell came up with the lower figures. Tangeman didn't want to speculate.

How does Parnell come up with a cost of $400 million to $500 million? Tangeman, like Leighow, also said different scenarios for such things as production and crude prices will produce different outcomes. Beyond that, he didn't want to speculate.

"We don't know what the context of the governor's the speech was," he said.

Contact Alex DeMarban at alex(at)alaskadispatch.com