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Note from Rep. Les Gara
Note from Rep. Les Gara  
Public Testimony Tomorrow: Oil Company Subsidy
Note from Rep. Les Gara

May 11, 2016

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Dear Friends and Neighbors,

Tomorrow the House Rules Committee, which normally does not hold hearings, is holding public and oil industry testimony on a new version of the Governor’s bill to reduce oil & gas company “tax credit” subsidies.  The Governor’s original bill included a modest tax increase to generate needed revenue in his bill, and much of that has been eliminated in the Rules Committee version of the bill.

I will give you a quick summary of concerns that I have.  In 2016 oil and gas companies will generate roughly $1 billion in state subsidies referred to as “tax credits.”  Some of these are paid in cash to oil & gas companies, and some are deducted from company Production Taxes.  Some believe these payments are “incentives” for companies to invest in Alaska.  There is no strong empirical proof of this.  Many believe companies invest based mostly on oil prices, the quality of oil reserves, and the safety and stability of the place they operate.  In any event, these tax credits are currently beyond unaffordable.  Oil prices are low, and around the world companies are scaling back investment until prices rise.  A recent international publication calls Alaska’s tax credit subsidies unique and generous when compared to other tax systems around the world.

Testimony will be from 4 – 6 p.m.  You can testify at your Legislative Information Office, or call 465-4648 to get in the queue to testify.  I know and agree that these times are not very convenient for people who work during the day.

Major Issues With New Version Of Bill

The testimony has been that no other place in the world allows such huge tax credit subsidies, in comparison to the oil revenue they receive.  Alaska is an outlier in this area of generosity.

One problem with this law is that through next year, it is estimated Alaska will pay out more in oil company tax credit subsidies than we get back in oil production taxes – for the third year in a row.  That is no way to address a $4 billion deficit.   We do receive a royalty, but very little in needed production tax revenue.

Here are a few more facts. 

Alaska’s oil and gas production tax, after allowing generous oil and gas company tax subsidies/credits, will generate less revenue for Alaska than we get from fishing and hunting license fees in three of the next four years. 

It will generate as little as marijuana taxes in two of the next four years. 

The new bill does not appear to change that until 2020, when a 4% minimum tax will apply.  Under the current so-called 4% minimum tax under existing law, through loopholes, companies can use deductions to pay as little as a 0% tax.  The Governor has proposed a true 5% minimum tax that companies could not reduce through deductions.  His version would have taken place now, when we need the revenue, and not be delayed until 2020.

The new bill effectively re-names a very generous, expensive North Slope oil company tax credit of 35%.  It is currently called a “Net Operating Loss” credit for times when a company loses money.  The state pays 35% of the cost of that loss.  The new name for what will essentially be the same tax credit is a “lease expenditure.”   Paying major oil companies to cover their losses, when the state receives very little in production tax revenue, is a one way street.

The bill does scale back tax credits for mostly small companies in Cook Inlet, where Alaska charges no production taxes on oil, and effectively no production taxes on natural gas. 

By keeping “lease expenditure” credits on the North Slope, the big three oil companies do quite well, as do new companies on the North Slope.  But the state’s tax rate is too low to afford these credits.

Here’s another concern.  New oil fields, and most fields after 2002, pay a 0% production tax at all prices up to roughly $76/barrel.  Oil is $45/barrel today.  That 0% rate is projected, based on oil price forecasts, (prices are projected by the state to be less than $76/barrel for the next decade) to last for 10 years under this bill.  At higher prices than $76/barrel these post-2002 and future fields pay a very low tax.  This tax break lasts for 10 years on all future fields under the current bill, which many of us believe is way too long a time.

Older fields currently pay a 4% tax, but that can be reduced with deductible tax credits, to 0%.  Many of us believe this 4% minimum tax should be paid, and should not be allowed to be reduced to nothing through subsidy reductions.  And many believe that as prices and profitability rise, this rate should rise in a way that is fair to the state and to industry.

That’s the skinny.

As always, please call if you have any questions of if we can help.

My best,

[signed] Les Gara

 

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