De-Mything Alaska’s Oil Taxes Part 1   Leave a comment

In February 2012, on the cusp of the Alaska Legislature passing SB21, Amanda Coyne and Alex DeMarban, both of the Alaska Dispatch News, ran a series of articles de-mything the claims the oil industry was spreading at the time. Most of what I am writing here is drawn from their articles. These issues are still relevant because Alaskans go to the polls this month to decide the fate of SB21. If we vote “yes” on Proposition 1, SB21 goes away and we revert back to the ACES taxation structure of the Palin era. If we vote “No” on Prop 1 (as the massive oil industry advertising campaign wants us to), we go forward with SB21 and bankrupt the state in about eight years.

That’s according to the Parnell administration’s own estimations, but not to worry, the oil companies have promised us that they will open up new development that will fill our coffers once more. There is no formal contract on that, but they promise …


Myth-busting claims in Alaska’s oil tax debate: Part 1

The Vote No on 1 Coalition argues that Alaska's old tax structure made it less competitive than other oil producing areas in the US and around the world.SB21 lowers taxes on the oil industry in Alaska by about $2 billion a year. That’s a lot of money. Alaskans own the resource. We are the equivalent of a landowner in North Dakota or Texas who leases their land to the oil companies for drilling. The only difference is that we do it through the State of Alaska. In this instance, the State is a land-holding corporation and the residents are the shareholders. As good shareholders, we should understand the issues, but unfortunately, we act more like voters who can be swayed by advertisements.

For the record, anytime an ad campaign floods the airwaves to the point that they shout down the opposition, I get suspicious. The Vote No crowd had me for a while, but then they started sounding desperate and every ad ends with the disclaimed “Major contributers — BP, Exxona nd Conoco Phillips.

Vote Yes - Repeal The GiveawayYeah, I felt manipulated and I had to go out of find out why.

Governor Parnell claims that SB21 will eventually result in an increase of a million barrels of oil down the pipeline. Maybe. There has been an uptick in development this year, but of course, given that it can take years to negotiate a deal on a jack-up rig and clear the environmental hurdles to use it, the chances that this new (barely discernable) increased development is the result of SB21 coming into effect last July — doubtful. There’s no contractual obligation for the oil companies to increase development. There could be — but there isn’t. There’s no guarantee that lower taxes mean more oil. Sean Parnell used to work for Conoco Phillips and will likely work for them again. Suspicious?

In the run up to SB21 and since (the controversy never waned), I’ve seen a lot of charts, grafts, etc. and frankly, even as an informed shareholder, I’m confused. What the heck is a marginal tax rate versus effective rate? Progressivity? Proven reserves? Gross versus profit I understand, but tariff and transportation costs? Okay, I’m dizzy.

The fact is that the idea that lower taxes automatically equals higher production is pure conjecture.

Oil is the lifeblood of the Alaskan economy. Maybe we could diversify, but we haven’t, so let’s be honest that the oil companies have made Alaska as we know it. Libraries, paved roads, and box stores are all largely due to oil. That doesn’t mean we should believe everything the oil companies tell us. We should be fact-checking the propaganda.

Which is what the Alaska Dispatch News did in 2012.

Myth 1: Oil companies are trustworthy business partners.

Sometimes they are, but Exxon fought the fishermen of Prince William Sound for two decades over the Exxon Valdez oil spill. Then there was that corruption scandal in the Alaska Legislature in 2006 that led to the conviction of several lawmakers on bribery charges.

Conoco Phillips, on the website Make Alaska Competitive, said Alaska has the “highest cost structure” of ConocoPhillips’ investments, but in 2011, company officials told analysts that Alaska has “higher-than-average margins”. Which is it? It’s either one or the other, it can’t be both.

Alaska’s constitution requires that Alaska’s resources be managed for the “maximum benefit of its people.”

Alaska v. Amarada Hess was a court case which found that from 1977 to 1992 companies were guilty of “deliberate falsification in computing the price paid to Alaska for its royalty oil” The judge concluded that the State of Alaska was guilty of “inexcusable trustfulness in dealing with the oil companies.”

Trustworthy partners? Well, maybe in the same way that my husky-mix is trustworthy to always find trouble when my back in turned.

Myth 2: Alaska oil companies are taxed 80 to 90 percent.

Anchorage Daily News columnist Paul Jenkins wrote that “Because of ACES, Alaska boasts among the highest marginal tax rates in the world, topping 90 percent when oil prices are high.” This statement can also be found on the Make Alaska Competitive website. It’s misleading.

Under ACES Alaska’s tax rate was not 80-90 percent. Russia, Algeria, Angola and private lands in Texas and Louisiana have a tax rate that high, but Alaska’s tax regime under ACES doesn’t even come close to those. On a $100 barrel of oil, Alaska taxed the oil company about $40 (or 40%).

This is where the marginal tax rate comes in. As income rises, so does the tax rate. So if the price of oil increases to outlandish amounts (hard to believe we now think of $100 a barrel as normal), the tax rate goes up, but we’re not there yet. The effective tax rate is really what’s important, but you don’t hear about that in the Alaska tax reform debates. Alaska taxes on profit and allows a hefty write-off — about $27 dollars a barrel under ACES, for what they pay to produce and transport oil. (ConocoPhillips actually claims it’s about $15, which brings up that question of trustworthiness again). So a 53% tax rate is levied on about $73 for a $100 barrel of oil. The oil companies keep $22.50, the federal government takes about $12.50 and the state gets about $39 from all taxes and royalties included.

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