ANCHORAGE — The House Resources Committee is in its second consecutive year of scrutinizing the state’s oil tax system as the Democrats now leading the committee look to implement tax changes former House and Senate Republican leaders balked at last year.
Debate on House Bill 111, the proposal introduced by Resource co-chairs Reps. Geran Tarr and Andy Josephson, both Anchorage Democrats, has not ramped up yet.
The committee instead has spent its time reviewing Alaska’s oil tax history and the fundamentals of industry taxation as there are four freshman legislators serving on House Resources.
HB 111 would end the state’s refundable tax credit program for small companies and raise production tax rates during times of lower market prices — such as now.
The legislation would appear to have a clear path through the Democrat-controlled House, but will undoubtedly face stiff opposition in the Senate.
Republican leaders in the Senate and even some in the oil industry have generally acknowledged a need to closely examine the state’s outlays for refundable tax credits, which was the focus of legislation last year. Yet, there is little appetite to change the underlying tax structure among Republican Senate majority members.
On Feb. 20 House Resources heard from Rich Ruggiero, a consultant to the Legislature and partner with Castle Group Advisors LLC, on general oil tax policy goals and what lawmakers should in-turn expect from the industry.
Ruggiero’s comments drew immediate skepticism from committee Republicans when he stated that he consulted on the crafting of Alaska’s Clear and Equitable Share, or ACES, oil tax system in 2007.
However, he qualified that by noting he advised Gov. Sarah Palin’s administration on the issue and it was the Legislature that doubled the progressivity rate of the tax first proposed by Palin.
Ruggiero mostly discounted the contention by many Republican lawmakers and oil advocates that the state will drive away business if it continues to fiddle with industry taxes. He said many other governments heavily reliant on oil revenue — though not to the level Alaska is — are also continually adjusting their tax structures.
“Alaska should not feel bad or be embarrassed that it is changing its fiscal system because the regimes around the world where the money is being spent changing their fiscal systems as often or even more often than Alaska is,” Ruggiero said, adding that instability also extends to prices, technology and other variables that impact a business climate.
Tarr noted further that several of Alaska’s recent oil tax changes have been at the behest of industry, while Rep. Dean Westlake, D-Kotzebue, emphasized that grappling with the roughly $3 billion ongoing budget deficit has thrown the whole state off-kilter.
“The State of Alaska is unstable now and it’s negatively impacting our public education, our public safety,” Westlake commented. “There are programs we absolutely do not wish to cut yet we are, so when we look at it from an Alaska business perspective and the multitude of in-kinds we do on the social side… we certainly are being negatively impacted.”
Ruggiero said further that most changes to increase taxes are done to collect additional revenue when market prices are high as opposed to the current proposals to increase taxes during a period of lower prices.
“Traditionally, most governments lessen their take at times of low price, not increase,” he said in response to a question from Rep. Chris Birch, R-Anchorage.
Any changes that are made should be done with a long-term view, he advised, and avoid measures that only serve to fill the state’s current budget deficit, which will hopefully be short-lived.
He also criticized Alaska’s current oil tax structure for its complexity of layered and field-specific tax credits; tax rates that vary depending on the region of the state; and a melded gross and progressive net profits tax for North Slope production. It all adds up to a system that is “hard to administer and even harder to audit,” Ruggiero noted.
Industry is partly to blame for not being more forthcoming with information that could help it partner with the state in crafting policy, he commented.
Instead, industry responds with vague and predictable rhetoric about the potential of lost jobs and reduced investment when tax changes are floated, Ruggiero said.
“You lack the data transparency you need to make informed decisions as a Legislature,” he said to the committee.
He urged companies to be more open and detailed about project economics and long-term plans and how various tax changes will impact them.
Absent that, what often happens is a government sets its tax rate to allow for what it views as a fair return on investment for producing fields without accounting for the failed investments or dry holes operators must factor into the economics of their successful projects, Ruggiero described.
He noted the federal Securities and Exchange Commission approved rules last year that will require resource extraction companies to disclose all payments made to the federal government for company fiscal years ending after Sept. 30, 2018. The rules are similar to what is required by Canada and the European Union, according to an SEC release.
“It’s never going to be you both mutually agree, but at least the state with what it decides to do will be coming from a position of knowledge and understanding and insight as opposed to one of guessing what’s going on based on a few reports here or there,” he said.
• Elwood Brehmer is a reporter at the Alaska Journal of Commerce and can be reached at elwood.brehmer@alaskajournal.com.
