Mathemagics

What’s going on

We’re in the home stretch, but the horses are running in slow motion.

The oil production tax bill is in the House and Senate Finance committees, which are – as Finance Committees will – taking their own sweet time. The House committee has the most optimistic schedule, which would send a bill to the Rules Committee Saturday night. Because things never, ever go as fast as predicted in the legislature, that probably means a bill will move sometime Sunday. Everyone expects that the Finance Committee bill will be different from any previous version, so people will need time to read it and try to understand it.

The current plan is to go to the floor on the same day the bill passes. Sunday will be the 25th day of the session. If people are persnickety about it, we could spend three days on the bill (second reading, third reading, reconsideration). We’d be at day 27, leaving three days to reconcile differences with the Senate and pass a final version. (Four days if everything goes right and the bill gets to the House on Saturday.) So, at best, it’s going to be a close call.

And we may not do anything at all. The oil companies don’t want us to increase taxes and, scandal or no scandal, they are still a potent political force.

Anything could happen, and it probably will.

Extension, si or no

The time crunch caused one of those waves that sometimes ripple through the Capitol on Wednesday. Suddenly, everybody wanted to know if we can extend the session beyond 30 days. Some people thought we could extend for three days. Others thought it was 10. Turns out, we can’t extend at all. The constitution sets the limit for a special session at 30 days. Period. Don’t ask me why.

The only alternatives would be for the legislature to call itself into a new special session, or for the governor to do it for us. Calling ourselves in takes a two-thirds vote of the legislature, or 40 votes. The voting is done by a poll.

The governor can call us in by proclamation. The constitution puts no limits on her ability to do that. Last year, we passed a law that says she has to give us 30 days notice, unless we are already in session or she acts within an hour of adjournment. I think the law’s a nice try, but if it is challenged the constitution will win, meaning Sarah Palin can call us anydamntime she wants to.

Tax law 101

Okay, now I’m going to try to explain the way the oil production tax works. Try not to hurt yourself if you nod off during this explanation and go face down in your Cheerios.

At the close of business Wednesday, a barrel of Alaska oil was selling for $94.87. Under a net tax system, you have to deduct the costs of producing that barrel to get its taxable value. We don’t really know what those costs are, since the first claims under the current Petroleum Profits Tax haven’t been audited. But the number most everyone uses is $23 ($16-$17 production costs, $6-$7 transportation costs). So the taxable value of that barrel of oil would be $71.87.

If only it were that simple.

The current tax law has ways a company can reduce how much it pays to the state, what are called tax credits. So the taxable value could be significantly lower. When people talk about the tax law offering incentives for investment, one of the things they mean is that a company that invests will pay lower taxes.

But let’s stick with $71.87. The current law sets the production tax rate at 22.5 percent, so the state would take $16.18. The federal government would take about 35 percent of what’s left, and the company would send the rest to the home office as profit.

If only it were that simple.

The current law contains provisions that raise the tax as the value of a barrel of oil increases. That’s called progressivity. Right now, the tax rate doesn’t start going up until the value of a barrel of oil reaches $40 over its production cost; in this example, $63. The progressivity rate is one-quarter of 1 percent per dollar, and it applies to the amount over $63; in this example, $31.87.

I’d try to do the math and get a final result, but I’d just embarrass myself. Besides, if you don’t know what a company is claiming in the way of credits, you can’t know the final result anyway.

The real point of this simple-minded explanation is this: There are many places the law can be changed to either increase taxes or decrease them. The allowable deductions could be changed. The base rate could be changed. The progressivity could be changed in several ways (where it begins, the so-called trigger point, how fast it rises, called the slope, and whether it is applied to the net value of the barrel or the gross value). The credits could be changed.

Or several things could be changed at once, with results that aren’t immediately obvious unless you’ve had at least the basics of this pounded into your skull like I have. Just one example. We could raise the base rate and claim we’re increasing taxes, but lower the progressivity and/or expand the credits and not really raise taxes at all. Ain’t politics grand?

Or the whole net tax system could be thrown out and we could apply a gross tax, which is easier to understand and harder to manipulate. Call me a foolish dreamer, but I’m still thinking that’s what we should do. But will we? That’s looking less and less likely.

Oh, and did I mention that this doesn’t account for other taxes the state levies on oil? And the royalties we get? I’d try to explain all that to you, but even I’m getting sleepy.

Another milestone

The woman who lets me live with her and I celebrated our 37th wedding anniversary on Wednesday. Not much of a celebration, actually, since I am in Juneau and she is in Anchorage. This is the first time we’ve been apart on our anniversary. I’d complain, but I actually volunteered for this duty. As my friend Harry Crawford would remind me, “You knew it was a snake and you picked it up anyway.”

More later,