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New Oil "Tax" Charges Alaskans For BP Pipeline Failures; Gives Away $5+ Billion In State Revenue Say Alaska Democrats


August 20, 2006

Alaska Legislative Democrats Sen. Hollis French, Rep. Les Gara and Rep. Harry Crawford highlighted what they call the oil company giveaways in the oil tax bill Governor Murkowski signed Saturday. "Giving away $5 billion in oil company handouts shortchanges our schools, our state, and our future," says Rep. Les Gara. Administration estimates about the revenue the new legislation may provide don't factor in the cost of most of these givebacks.

French, Gara, and Crawford stated in a news release Saturday that one of the most controversial is a subsidy to BP, in the form of deductions and credits which will require the state to pay a portion of BP's costs related to the recent pipeline shutdown, and BP's failure to maintain its pipelines. They say those costs are likely to exceed $100 million. Under existing law, and the Democrats' oil tax proposal, BP would not have been allowed to charge Alaskans for those costs. "This is a gift to BP for doing the wrong thing," said Sen. French.

Quoting their news release, perhaps the greatest defect in the legislation Governor Murkowski signed Saturday is that it allows oil companies to avoid taxes by hiding their profits. It taxes a percentage of the profits oil companies report to the state. "If Enron can cook its books, you know Exxon and BP can too. That's going to cost Alaska billions," says Rep. Harry Crawford (D-Anchorage), who sponsored legislation to tax oil companies on the sales value of their oil, and not profits.

Since 2004 Democrats, including French, Gara and Crawford, have pushed a verifiable tax system based on a percentage of the sales, or "gross" value of oil. That proposal has been championed by members of the public, oil company watchdog organization Backbone, and every candidate for Governor except Governor Murkowski. Republicans voted as a party bloc against this Democratic proposal, including House Speaker John Harris, who conceded the Democratic plan would have had support of a majority of legislators had they chose to work in a "bi-partisan" manner according to a story reported on August 4, 2006.

French, Gara, and Crawford say the Republican bill gives away $5 billion in future tax revenue as a bonus for expenditures the companies would have made anyway these Alaska Legislative Democrats said in a news release. For example, they say Exxon has been ordered by the State to develop the already profitable gas reserves at Point Thomson without any state subsidies. HB 3001 requires the state to cover 42.5 percent of Point Thomson development, essentially rewarding the companies $1 billion for failing to meet their responsibility. "This bill gives almost every penny raised from Exxon, BP and Conoco in oil taxes back to them as a reward for investments they were going to make anyway," French said.

Alaska Democrats' Summary of the oil company giveaways:

Giveaway # 1: $3.8 billion To Subsidize Gas Operations.

The oil companies have demanded, in essence, that much or all of the additional oil revenue they pay under any oil tax legislation, at predicted average prices, be returned to them in gas subsidies. When the Legislature began this debate, we all agreed the oil tax system needed to be changed. Unfortunately, the bill now gives back much of what is raised in additional oil revenue through a series of gas-related write offs.

The proposed legislation requires that the state pay 40% (through a 20% deduction and 20% credit) of the cost of non-pipeline related gas field development costs (for exploration, production and production facilities). The state will not receive any ownership share in these facilities/projects.

In June the Legislature's consultants estimated those costs at $9.2 billion, $2 - $3 billion of which will be for the development of Exxon-managed Pt. Thompson, a gas and oil field the Department of Natural Resources has already ordered (under former Commissioner Tom Irwin) Exxon to develop with no state subsidies. It is universally agreed that once a gas pipeline is agreed upon, gas production will be magnificently profitable, and that state subsidies to develop gas fields are unnecessary. This give back amounts to a roughly $3.8 billion tax reduction. That eats away about 10 years of additional oil tax revenue raised (assuming companies fairly report their profits) under under this legislation.

BP has stated: "It is very likely that, in the medium term, prices will stand at about $40 on average." Lord Browne, Guardian Unlimited, 7/12/06. It is projected that over the course of the next 10 years, at $40 barrel, the new legislation will raise an additional $4 - $5 billion in oil tax revenue before these deductions and credits are subtracted. These gas write offs will eat away almost 10 years of projected future oil tax revenue.

Giveaway # 2: $500 Million to $1 Billion to "Reward" Companies for Past Investments.

The proposed legislation includes an unprecedented retroactive tax credit. Companies can receive a 20% deduction from their tax payments for their past 5 years of capital investments. It is estimated companies have averaged roughly $1 billion in investment per year, and 20% of $5 billion equals $1 billion in tax payment reductions. The formula provides that they can write off 1$ in past investments for every $2 they invest in the future. If companies simply invest at the level they have in the past, they are entitled to half of this credit, or $500 million in tax payment reductions. If they increase their investments they can qualify for up to an additional $500 million. It is irresponsible, and unprecedented, to give a $500 million to $1 billion tax break for past investments - especially past investments made under a broken tax system that helped earn them record profits. Again, this give back was requested by the oil companies to offset any increase in future tax payments.

Giveaway # 3: $350 - 700 Million For Delayed Implementation Date.

Democrats, and the Governor when he originally proposed his bill, have called for the new tax to become effective on the first of this year. Normally tax legislation takes effect the first of the year, as did Alaska's 1989. The Governor now requests that the bill not take effect until July 1, and current legislative proposals would implement the bill as of April 1. A 3 month delay reduces this year's revenue by roughly $350 million. A 6 month delay would reduce revenue by roughly $700 million. If the oil companies are being given 5 years of retroactive investment credits, then the state is easily entitled to implement this tax, as is the norm, as of January 1, 2006.

Giveaway # 4: $1.2 - $2 billion/Year - The New Proposed Tax Falls Far Short of the World Average Rate:

According to the Legislature's Expert, Daniel Johnston, "the world average government take even right now is probably 67% or 70% depending on how you calculate it." Joint House Resources/Finance Committees, March 6, 2006. International consulting firm Wood Mackenzie says it's 70%. That's the total percentage of oil value received by local, state and federal government. Projections are that the current legislation would result in a government take rate of roughly 60% at $60/barrel. At $60 barrel each percentage of government take raises roughly $200 million in revenue. Falling 7% - 10% below the world average costs the state between $1.4 billion and $2 billion/year in lost revenue. Early testimony on oil tax legislation was that the state would be justified, given the relative safety of investments, in taxing at the world average.

Total Loss To Alaska In Bill:

Tax Write-offs: $4.6 billion - $5.5 Billion

Taxing Below World Average: $1.2 - $2.0 billion/year


Source of News:

Alaska Democrats


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