Under the premise of not wanting to gamble on future state oil and gas tax revenues, Gov. Sarah Palin recently decided to fold on the Petroleum Profits Tax and up the ante with ACES.
At a press conference held at the UAA/APU Consortium Library, Palin and Revenue Commissioner Patrick Galvin outlined the current administration’s plan to attempt to update Alaska’s oil and gas tax at a special session this October. If all this talk of special sessions and petroleum tax changes seems familiar, it’s for good reason – it’s not deja vu, we did it last year too.
As the latest in a string of acronyms for Alaska’s oil and gas tax system, Palin’s “Alaska’s Clear and Equitable Share” petroleum tax program promises to be everything that we had to abandon to the Economic Limitation Factor, without all the problems of the PPT. Plus, ACES has the added advantage of being the only oil tax acronym that can be simultaneously cheered for alongside Alaska’s professional hockey team. “Go ACES!”
But why change Alaska’s oil and gas tax system again so soon? According to Palin and Galvin, part of the problem involves the circumstances the tax was passed under, while the remaining issues seem to lie in the PPT itself.
Given the current FBI probe into misconduct involving Veco bribes and the Alaska State Legislature, the pressing question seems to be not if we should revisit the tax structure, but what, precisely, we should do about it. Palin may be on the right track by replacing the PPT – bribery charges directly involving votes and influence in passing the PPT have already been filed against Rep. Vic Kohring and former Reps. Pete Kott and Bruce Weyhrauch, and more Alaska politicians like Ben and Ted Stevens are being investigated for possible misconduct involving the oil industry.
So far ACES carries none of the stigma or suspicion of the previous administration, and even goes so far as to propose fixes to several of the surprisingly visible flaws in the PPT.
Incentives to reinvest oil profits will always remain an important focus in this state, but it wasn’t hard to see the potential for abuse in the PPT. Allowing oil companies to deduct many of the costs of doing business in Alaska, such as maintenance, from tax payments seemed an invitation to creative bookkeeping, especially considering the recent corrosion issue with BP’s North Slope pipeline. ACES aims to fix this issue by eliminating retroactive deductions and establishing audits, giving back to the state the final say regarding what does and doesn’t qualify as deductible.
Only knowing where ACES surpasses PPT paints a partial picture, though. Without reviewing the proposed tax plan side by side with PPT, it is impossible to know what useful or beneficial items may have been stripped from the PPT in pursuit of the “new and better.”
State Senate President Lyda Green and others have suggested erring on the side of caution when evaluating the usefulness of the PPT. According to the Department of Revenue, tax revenue generated by the PPT last year actually exceeded prior gains by $1 billion, but is still projected to fall $800 million shy of original projections for fiscal year 2008, mostly due to somehow unexpected maintenance deductions. Palin remains firm on going forward with ACES, however. “Doing nothing is not an option,” said the governor on her Web site. So if Palin is determined to take action, she could probably do worse. PPT and ACES are similar in many aspects. Both plans offer a net tax-based approach to encourage reinvestment, and both operate on a sliding scale to maximize profits on high-value oil. One major advantage of ACES is that it includes a 10 percent minimum tax on gross receipts for North Slope legacy fields, while PPT taxes on those same fields, according to the Spring 2007 Revenue Sources Book, would dry up at $30 per barrel or lower prices.
What it all really boils down to, though, is that the current plan is one former Veco executives literally bribed legislators into accepting, and no arguments on any possible merits of the PPT can change that fact. With that kind of stigma attached, patching the current plan is not likely to happen. The fact is – the latest announcement cements it – Palin will be bringing a replacement oil and gas tax plan to special session in October.
What remains to be seen is whether legislators give in to Palin’s popularity and back her bill or attempt to push a separate bill. Changing the oil and gas tax plan for the third time in three years may be a big gamble, but it’s one that could potentially pay off. Palin has shown us all her pocket ACES; at this point, all we can do is wait to see if the legislature will check, call or fold.