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
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 KTUU.com 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
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
Giveaway # 3: $350 - 700 Million For Delayed
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
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
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