by Rep. Ralph Samuels
March 29, 2006
If we take too much, we will hurt investment, if we take too little, we can never get it back, and when the resource runs out, or the price drops precipitously, we will not have the reserves to keep the State running properly.
When we say, "hurt investment," what exactly does that mean, and what are the consequences? Currently, the oil industry invests over one billion dollars annually producing current oil fields and exploring for new ones. This money keeps production from dropping at an even higher rate than it is, and gives us a chance that new smaller fields will increase the amount of oil flowing through the pipeline. This being said, the production continues to decline. The geologists tell us that there are no Prudhoe Bay size fields left on the North Slope, and that we need the investment dollars to squeeze more oil from the major fields of Kuparek and Prudhoe. This in turn begs the big question, "At what tax rate will investment slow, and by how much will it decrease?"
If we lowered the tax rate to zero, would investment on the slope go through the roof, increase production, and give the State more royalty money than we would have had in taxes? If we raised the tax rate to 100%, would investment dry up completely, but we would make lots of money on current production, with no chance of getting more oil, until Prudhoe simply dried up? Although these extreme examples are not being discussed in the Legislature, the concepts of investment vs. tax rate are being discussed ad nauseum.
The original plan that the Governor put before the Legislature proposed substantive changes to our severance tax laws. The new plan would allow the investors to completely recover their capital investments before we would tax them. We would still take our royalty, but no severance taxes would be imposed before investments were recouped. This method would allow the State to share in the wealth generated by high oil prices, and to share some of the risk at low oil prices.
The House Resources Committee made some changes to the Governors proposal. We left the idea of cost recovery in place, and we left the proposed tax rate on the profits in place at twenty percent until oil prices reached a high level. Our reasoning was that investment decisions are economically modeled at a wide range of prices, but investors do not put too much emphasis on very high prices when making their decisions. They need to look at their own internal oil price forecasts and judge their risk tolerance. The House Resources Committee left the tax rate at the proposed twenty percent until oil prices reach fifty dollars/barrel. After fifty dollars/barrel, the tax rate escalates with the price. At current prices, the rate would be approximately 23%.
In addition to the tax rate, the other factor is the tax credit. The original proposal had a tax credit rate of 20%. This means that for every capital dollar spent in Alaska, the State will pay for 20% of it. This encourages reinvestment in Alaska, both in current fields, and new exploration. If you do not invest here, you do not get the tax credit.
The House Resources Committee left the tax credit numbers in place, and added more for true exploration investment.
The Committee had daily hearings for almost a month. We had global experts from all points of view, tax lawyers, accountants, executives, and economists testify on all aspects of this most important bill. We changed many things, but nothing compares to the three big subjects mentioned here: tax rate, investment, and tax credits.
After the month of hearings it all comes down to one thing. Balance.
About: Rep. Ralph Samuels (R) is a member of the 24th Alaska State Legislature representing House District 29 - Anchorage. He serves as Chairman of the House Resources Committee. He is a life-long resident of Alaska.
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