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'Go to the gross' for oil tax solution
By Rep. Ethan Berkowitz


July 10, 2006

Here we go again. Off to Juneau to fix the broken oil tax system. With a little planning, this time we can reach a solution that works.

Alaska can be compensated in one of two ways for its oil and gas resources: We can take a share of the gross value of the resource, or we can levy a tax on production profits. The administration proposes changing to a net profits tax, which they call the Petroleum Production Tax. It works like this:

1. Take the gross value of oil.

2. Subtract expenses.

3. Multiply by a tax rate.

4. Deduct credits.

There's one huge flaw with this formula. It's problematic and contentious determining expenses because expenses are in the eye of the beholder. What qualifies as an expense for one auditor might not qualify for another.

There's a simple solution: Forget about the expenses part of the formula. Get away from net profits and "go to the gross":

1. Take the gross value of oil.

2. Multiply by a tax rate.

3. Deduct credits.

That way we collect the market value of the resource, not what the accountants and lawyers in London and Houston calculate they want to pay after deducting what they consider expenses. Under the gross, Alaska is in charge. It's also simpler for the state to administer, easier for the taxpayer to understand, and more transparent for the public - and it's already well-established in existing law.

Remember, we're just looking at one piece of the oil tax system - severance taxes, the price we charge for taking resources from the state. In addition to severance taxes, state revenue from oil comes from corporate income taxes, property taxes, and royalty oil. The current severance tax, the Economic Limit Factor, needs repair because one part of the formula wasn't designed for prolonged high oil prices or large fields past their peak production that remain fantastically lucrative. As a result, Alaska loses millions of dollars every day.

Some farsighted Democratic legislators have pointed this out for years, and it's why we have to act now. There's a way to have a productive special session.

First, "go to the gross" and get away from the hairsplitting debate about whether 20 percent or 22.5 percent or 25 percent tax rate of the net makes the most sense. Under a profit system, clever accounting can make expenses exceed revenues, putting state finances and state services in jeopardy.

If you doubt that the oil producers are tenacious when it comes to dodging payments, just remember how long Exxon has avoided paying the billions it owes, or how we're still battling over oil pipeline tariffs. I don't blame them for their reluctance; that's what they're supposed to do for their shareholders. Shame on us, however, if we get fooled again - our first duty is to Alaska.

Second, it is a mistake to link the gas line and oil taxes; we shouldn't trade today's oil for tomorrow's gas. The markets for the two are different and the economics of each are unique. Combining oil and gas puts the state at a disadvantage and deprives us of our fair share from both resources.

For example, legislative analysts and former Alaska Department of Natural Resources officials suggest that gas line investment tax credits and deductions to prop up the proposed pipeline deal could cost the state billions.

Finally, words matter at least as much as numbers. That means closing loopholes, eliminating giveaways and making it difficult to game the system. We must be clear up front about what is and is not exempt from taxation. Otherwise, we'll be in court forever, fighting to get our fair share, at the mercy of the legal system and oil companies. That's no way to promote the certainty and stability so critical for a good investment climate, and it's no place for a proud, sovereign state to be.

Sometimes the simple solutions are the right solutions. "Going to the gross" is simple, it's proven, and it's right for Alaska.


About: Rep. Ethan Berkowitz is the Democratic House Leader and a 10-year veteran of the Alaska Legislature from Anchorage. He is currently running for lieutenant governor.


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Ketchikan, Alaska