State revenue outlook improves with oil price rebound
Alaska’s ride on the oil price rollercoaster should again get a little smoother as markets have recovered quicker than expected from the pandemic but special provisions in the CARES Act will cause the state to forgo some corporate tax revenue as well, according to Department of Revenue officials.
“Revenues are moving in a much better direction, which is up,” Revenue Commissioner Lucinda Mahoney remarked during a March 16 Senate Finance Committee hearing.
The Revenue Department published the spring update to its official Fall 2020 Revenue Forecast March 15 with projections that the state will collect approximately $791 million more over the next year-plus than was thought last fall.
Higher oil prices and increased production — a rare combination of late — are the primary drivers behind the slightly improved fiscal outlook though the expected additional revenue would not nearly come close to fixing the state’s structural budget deficit.
The state is specifically projected to collect $332 million more in the current 2021 state fiscal year than was thought last fall and $460 million more in fiscal year 2022, which starts July 1. The added revenue would cut current year deficit down to approximately $550 million and the deficit in Gov. Mike Dunleavy’s 2022 budget proposal would fall to roughly $1.7 billion, according to figures from the Office of Management and Budget.
Petroleum taxes and royalties currently account for about 20 percent of all state revenue, according to the forecast.
Chief Revenue Economist Dan Stickel told Senate Finance members that global oil markets seem to have rebalanced quicker than most analysts expected in recent months, which led to an updated average price forecast of $53.05 per barrel of Alaska North Slope crude for fiscal 2021 and $61 for 2022.
The new price projections are nearly $8 higher for 2021 and $13 higher for 2022 than what was expected last fall and were based on Brent benchmark oil futures prices in late February, according to Stickel.
The price for Alaska oil has largely plateaued in the high $60s per barrel in recent weeks. State economists expect oil prices to stabilize after 2022 and rise with inflation.
“We believe that looking at financial markets is probably the best indicator as to where oil prices are headed,” he said.
However, he also cautioned that there is “particularly large uncertainty” with the forecast given what happens to COVID-19 cases domestically and worldwide in the coming months.
On the production side, North Slope operators will ultimately produce about 5,000 more barrels per day on average this fiscal year than was thought last fall as well, according to the forecast, which now pegs 2021 North Slope oil production at 482,000 barrels per day.
According to Stickel, Revenue and Department of Natural Resources officials still believe the lack of drilling on the Slope last year will still lead to a sharp drop in production in 2022, but it isn’t expected to be nearly as severe as once thought. Last fall they were predicting a year-over-year North Slope production decline of 38,000 barrels per day; that has been revised down to a decline of about 23,000 barrels per day for 2022 production of nearly 460,000 barrels of oil per day from the North Slope.
Production is also supposed to rebound and begin a longer-term upward trajectory after the 2022 dip. State officials now expect North Slope operators to collectively produce more than 502,000 barrels per day by 2024 with production exceeding 555,000 barrels per day by the end of the decade.
“We’re expecting a lower decline rate in the existing fields and then an improved outlook regarding new fields coming online with the higher price forecast,” Stickel said.
CARES Act refunds
The COVID-19 relief bills passed by Congress last year directed approximately $5.8 billion to Alaska but special corporate tax provisions in the first aid package are likely to cost the state $162 million in forgone revenue through 2022, according to revenue officials.
Stickel said the CARES Act passed nearly a year ago allows corporations to “carry back” net operating losses from 2018-20 for up to five years and receive refunds for previous taxes paid. Another provision allows companies to “accelerate alternative minimum tax refunds into tax year 2019,” he said, and because Alaska uses the federal corporate income tax code by reference in state statute the federal tax changes will hit the state if the Legislature does not change them.
“The biggest refunds are expected in tourism-related companies, which are expected to show very large losses for 2020,” Stickel said.
Overall, the state is expected to collect $80 million in corporate income taxes this year and $35 million in 2021, compared to $102 million and $175 million for the respective years without the tax changes, according to Stickel.
Total annual corporate income tax revenue should return to roughly $240 million by 2023 when the impacts of CARES Act provisions and broader pandemic economic conditions will lift, according to the forecast.
Elwood Brehmer can be reached at [email protected].