One Thing to Give Thanks For: Oil Tax Completed

No, it’s still not a perfect world, or a perfect tax.

Probably every one of us has reservations about switching to a net profit tax. As one of my colleagues wrote,

“The companies exploit every loophole they can find or create. The state catches them in at least some of these attempts. Will the new tax law change this? No. There are still plenty of nooks and crannies for the companies to exploit.”

Having said that, I believe that Alaskans have done a commendable job crafting a bill that will bring more revenue into the state and still encourage future exploration. In particular, great kudos must go to the leadership of Beth Kerttula and the many legislators who spent hundreds of hours finding the balance. I am proud of the bill.

Here are some of the highlights of what was passed

Major Bill Provisions

• Raises the base tax from 22.5% to 25% of net profits
• Increases the rate at which the tax increases at high prices (called progressivity) from 0.2 percent per dollar to 0.4 percent per dollar above $30 net profits
• Caps operating expense deductions in the biggest oil fields for three years at 2006 levels
• Allows the state to write regulations to dictate what deductions are allowable
• Disallows deduction for repair costs to the BP feeder lines that failed in 2006, and similar deductions in the future
• Allows the Department of Revenue to limit how much companies can deduct for Pipeline tariffs to “just and reasonable costs”

I am quite certain that the bill we passed didn’t go “too far.” The large revenue increases that were reported in the newspaper are only relevant at very high oil prices such as we’ve seen in recent months. At those prices, Alaska’s oil fields are extremely profitable. At lower oil prices (below about $55 / barrel), the ACES bill only increases taxes by 2.5%, and actually brings in less money than what the last legislature estimated revenues would be when they passed PPT in 2006.

Information Tools

In addition to the revenue sections, the ACES bill contains important information requirements that will help the State of Alaska better understand our oil fields- both geologically and financially. These provisions will enable us to better predict future revenues, help determine how to open up the rest of the North Slope to new development, and help Alaska move closer to the natural gas pipeline.

Greater Balance

This bill also goes a long way towards making the Slope a good place to do business. Between the various credits and subsidies, it has been estimated that the state will be contributing up to 60% of the cost of new development.

Here are some of the Specific provisions in PPT / ACES that help get new development and benefit small producers and explorers:

• Capital Expense Credit. In addition to being able to deduct expenses, money spent for construction / new production is eligible for a 20% tax credit. Basically, if you spend $100, the state will pay you back $20. If you have production, you can deduct the $20 from your taxes, and if you don’t, the state will send you a check.
  The size of this check was formerly limited to $25 million per company per year. In ACES, that limitation was eliminated.
• Exploration Incentive Credit. This provides a state tax credit of between 20% and 40% for new exploration outside of traditional drilling areas. The size of the credit is dependent on several factors including the distance from existing wells. In ACES, the most commonly used credit was increased from 20% to 30%.
• Transitional Investment Credit. This provided a retroactive tax credit for capital investment made in 2001-2005, the years immediately before the transition to PPT. Although the ACES bill eliminated much of this, it kept it in place for new companies who hadn’t previously produced oil in Alaska.
• Small Producers Credit. Companies that produce less than 100,000 barrels of oil per day are eligible for a no-strings tax credit of up to $12 million / year

FUN STUFF

Lego League!

Last weekend I had the opportunity to watch our junior high teams compete. We had the Legoators, the Spybots, One-Eyed Weasels, Salads and many other teams. They built computerized Lego robots, planted trees, moved trucks, and set up wind mills, all on a table board in Centennial Hall. It was great fun to watch, and offer my congratulations to the winning team of Legoators from Hoonah. Thanks to all the kids that participated, their parents, teachers and many volunteers.

SAIL

Also in the past couple of weeks, the Southeast Alaska Independent Living organization had a major fund raising dinner. There are so many wonderful organizations in Juneau doing great work for people, and SAIL is one of them. It is gratifying to watch the recipients of their services ski, canoe and generally enjoy the great outdoors. Thank you SAIL.

Holidays

As we celebrate the Thanksgiving holiday, we give thanks for the services of our troops overseas.

Much fun in Juneau, with the market and all the plays, dances and festivities. Juneau is a buzz in the winter season. Take care!

Sincerely yours,