The Oil
28 April 2006The following is a very brief overview of the oil production tax currently under scrutiny in the State Legislature. The debate is complex, and this blog highlights only a few points.
This is the second blog in a series. Please click here to view the previous blogs.
The Oil
Oil was discovered in the 1960s on the North Slope. In the 1970s, the Trans-Alaska Pipeline System (TAPS) was built, enabling producers to harvest the oil and bring it to market. The pipeline runs from the Slope to Valdez, where it is shipped to the Lower 48 and foreign markets.
The biggest oil producers working on the North Slope are BP, ConocoPhillips, and ExxonMobile. The oil producers lease the rights to the oil and gas from the State of Alaska. The state still owns the land, but the producers can drill for oil on it. The North Slope is the largest area on which the producers work. There are several different “oil fields.†These are different areas in which they have found oil, leased the property, and are now drilling.
The Money
A significant portion of the state operating budget comes from the oil production. Alaska makes money four ways:
1. Production Tax (or Severance Tax): The Severance Tax is the largest of the three types of taxes paid by the oil corporations. This is a tax based on how much oil the producers harvest. This is done by taxing each oil field independently. For example, if ConocoPhillips leases three fields, they are taxed on each field, not on the total amount of oil that comes out of all three (this is important, see below). The tax is not responsive to the market. That is to say, regardless of the price of the oil, the tax is the same.
2. Corporation Tax: This is the tax that corporations which operate in Alaska must pay.
3. Property Tax: This is the tax on the properties that the producers own. For example, the BP building in mid-town Anchorage.
4. Royalties: The state of Alaska owns a percentage of each of the leases, generally 12.5% - 16.66%. In other words, the state is like a shareholder. As with any stock, the State gets a percentage when the product does well. These dividends are the source for the Permanent Fund Dividend. Twenty five percent of the royalty revenue goes into the permanent fund. Individual PFDs are determined by taking the average of the past 5 years of royalties, subtracting necessary costs (ie. lease expenditures and standard deductions), and dividing the remainder by the number of Alaskans eligible to receive the PFD. Taxes do not go into the permanent fund.
Aside from federal monies, oil royalties are the largest source of income for the State of Alaska. Royalties are generally taken in cash, but the Commissioner of the Department of Revenue can decide to take the royalties in-kind, taking oil rather than cash.
Together, taxes and royalties from the oil industry make up 75%- 90% of the State’s unrestricted operating dollars.
The Debates
1. The Economic Limit Factor (ELF) protects the oil corporations from paying as much in tax for smaller oil fields which don’t produce as much. However, many of the larger oil fields which produce an abundance of oil have gotten through the loopholes. Therefore, many of the oil corporations’ bigger fields are producing almost tax-free.
The new tax structure under consideration utilizes a Production Profit Tax (PPT). This tax is responsive to the market – when the oil companies make more, Alaskans makes more. The structure eliminates the ELF. The oil corporations are taxed on the total amount that they harvest rather than the per field system now in place. However, this tax structure is volatile. If oil prices decrease, as they did in the 1980s, the state will lose revenue.
2. Another debate has largely centered around how much to tax. There are usually two numbers discussed during these debates. The first number is the actual tax rate. The second number is the percentage of credits that the oil companies can take. This is not entirely different than tax credits that an individual would take on their income tax returns. The most commonly discussed terms are 20/20 and 25/20. To see the House and Senate versions of the tax structure being debated, see the AK Democrat’s comparison chart.
3. The Governor and the oil producers have been advocating a guaranteed tax rate; the Legislature determines the rate now and locks it in for the next 30 years. This would actually be illegal without a constitutional amendment. Further, in the past 25 years, the state has significantly changed the oil structure twice. Is it wise to be locking it in now for the next 30 years?
This is a brief overview of what has been happening with oil tax. For more information, I found the Alaska Democrats page very helpful.
- kt