COMMENTARY: Misleading language in oil tax law allows claim of high tax rate
Last week an op-ed went out that somewhat mangled the reality of Alaska’s nearly non-existent oil production tax. I appreciate the opportunity to set some facts straight, so we can all have a fair discussion on an important topic.
According to the Department of Revenue, next year oil companies will generate more in state-owed oil company tax credit subsidies than they owe in oil production taxes. In the following two years, unless the law is changed, generated tax credits will erase more than half our oil production tax revenue, at a time when schools are struggling and we have a $3 billion deficit.
A recent editorial made some claims about our current oil tax rates. They were incorrect. To help, I’ll share some analysis from a 2017 State Department of Revenue Report.
Alaska’s current oil production tax rate falls at lower prices under a sliding scale tax formula. The average North Slope so-called “New Field” (a definition that includes at least three old fields) pays a zero percent production tax, no matter how profitable, for the first seven years at all prices under $70/barrel. That’s according to the Department of Revenue report.
That same report notes that the remaining North Slope fields, on average, pay a small flat four percent gross tax, no matter how high profits are, all the way up to prices of $73/barrel.
Zero percent and four percent oil production taxes (this doesn’t include royalties) are a pathway to austerity at a time of $3 billion budget deficits. At higher profits, companies should pay a fair share, to help balance out a fiscal plan so we can have a stable economy and budget, and good schools, and a trained work force.
The recent editorial addressed Alaska’s mythical “35 percent” production tax rate. There is no 35 percent oil tax rate under Alaska law.
I’ll just let an excerpt from a recent Alaska Dispatch piece set the record straight. The Dispatch wrote:
The state has a 35 percent oil tax, declared Dan Seckers, a tax attorney for ExxonMobil in Anchorage. “I’m sorry I can’t let you get away with that,” Rep. Les Gara said. He said that is true only if or when oil ever reaches $160 a barrel.
“The lower the price, the lower the actual tax rate,” he said. Gara is correct. The system in state law has a built-in tax reduction at lower prices.
He quoted from a chart prepared by the Department of Revenue that shows the effective tax rate is 12.1 percent when oil is at $60 a barrel.
For oil that comes from areas such as Point Thompson, eligible for an extra tax break, the tax rate is zero at $60. Oil is now at about $50 per barrel.
“There is no 35 percent tax rate, it is price sensitive,” said Gara.
Seckers wanted to argue this. “Sorry, I think you’ve misspoken on this, he told Gara. “The statutory tax rate in Alaska is 35 percent. You don’t believe me? Ask your director of tax under Section 011e.”
That section mentions 35 percent and there is no question it is in the statute, but it doesn’t mean much. No company pays anything close to that percentage or will be in danger of paying that amount unless oil increases by more than $100 per barrel. At $160, the tax would be close to 35 percent.
Seckers did allow that Gara is correct that the “effective tax rate” is far lower. Case closed. The effective tax rate is what matters.
But I understand Seckers’ misplaced insistence on 35 percent, as otherwise he would not be able to testify repeatedly at hearings that Alaska has an oil tax rate under SB 21 that is three times higher than anywhere else in the United States.
“You know what the next tax rate is in the United States on production?” Seckers asked the House Resources Committee during a Feb. 1 meeting. “Twelve and quarter. Louisiana. You guys are almost three times as high as any other state in terms of production tax. Why was that (SB 21) an improvement so to speak? Well, because it was predictable.”
What’s predictable is that it is misleading to say we have an oil tax that is three times higher than anywhere else in the U.S.
And what’s also predictable is that this is a word game, the result of deceptive language that found its way into SB 21. The result is that the real tax rate, which varies with the price, is far below 35 percent under any circumstance that we have seen.
Thank you for letting me set the record straight. I hope we can have a discussion based on facts, and find solutions to move this state, and our needed partnerships with the oil industry, forward.