SOLVING ALASKA’S FISCAL PROBLEMS
By Mary Lynne Dahl
September 06, 2020
How can we do this? Don’t kid yourself and say that if/when the price of oil goes back up, we will have the revenue we need. It may or may not recover much, but under the current system we have with big oil, higher prices will not solve our financial problems. It will produce more profit for oil companies, but do little to produce a profit for Alaska, due to the current production system of royalties and taxes.
That leaves Alaska with the prospect of raising taxes on her citizens. Income taxes, sales taxes, property taxes etc. That is a decidedly unpopular solution, to say the least. However, would it work? With a state population of 552,378 adults (2019 data), a 3% state income tax would only produce $592million in revenue, and by itself, that is not enough. In addition, it is unlikely that everyone would be subject to an income tax, particularly low-income citizens and/or those with moderate income and dependents, so the actual revenue would likely be less. The shortfall would have to be made up from additional taxes or substantially higher state income tax rates.
There is a better solution for raising more revenue, however. It is to pass the Fair Share Act, proposition 1 on the state ballot on November 3.
The Fair Share Act will change the production tax on oil revenue to the state by increasing the share given to the state by big oil. It only requires big oil to pay their fair share of the revenue from our own oil.
Prior to passage of Senate Bill 21 (SB21), Alaska received a royalty of 26% of revenue on the oil produced. SB21 reduced that royalty to 12.5% which results in current income of about $1 billion for Alaska. The rationale for SB21 was to “incentivize” oil companies to produce more oil. Without the royalty split and tax credits (incentives) Alaska pays to big oil under SB21, we would receive $2 billion in royalty income today from big oil. However, we only get half that.
Given the enormous sacrifices that Alaskans have been asked/forced to make and endure, it seems very unfair to allow big oil to be overcompensated instead of giving Alaska a fair share of the revenue from our own oil. In fact, it was unfair from the start. And, it would be unthinkably unfair to expect Alaskan citizens to pay any amount of income tax while big oil receives such an unfairly large percentage of the income it realizes from the sale of our own oil.
The major oil companies who produce oil in the legacy oil fields that will be impacted the most by the fair Share Act obviously do not want any changes in the production tax and royalty system they enjoy. They have complained from the very beginning of the Trans Alaska Pipeline (TAPS) that they deserved more and more and more and they are still complaining, in spite of the fact that Alaska is the most profitable oil producing customer that they have anywhere that they pump and sell oil. They make a higher profit in Alaska than almost anywhere else on earth.
The list below shows the royalties, state by state, that big oil pays to each state:
Texas - 25%
Is this fair? NO.
The big oil companies that will be affected by passage of the Fair Share Act will continue to make large profits in Alaska, even with a smaller percentage of the revenue. It will just not be the enormous amount they have been given for the last few years. It will end the underserved giveaway of Alaskan’s share of the money, but it will still be very profitable.
Of course, big oil threatens all kinds of terrible consequences if the Fair Share Act passes. It claims that taxes will go up. It says it will cost Alaskan jobs. It says it will hurt Alaska’s future and slow growth. None of these are true. To get the facts on each of these false scare claims, visit www.fairsharealaska.com where each of these claims is briefly discussed in clear language, without legalese or scare tactics.
In the past, big oil has indirectly threatened to pull out of Alaska if we do not give them the incentives they demand. Unfortunately, too many people, including legislators, believed them. Big oil will not pull out, however, and there are some very compelling reasons why they will not leave in the near future. The first is that Alaska is their very best customer, as is clear from the list above. Alaska is just too profitable a customer, even if the Fair Share Act passes, for big oil to walk away from.
In addition, big oil will not walk away from Alaska because it would forfeit a gigantic pool of cash that it has been required to set aside as a contingency in the event it does not honor its contract to continue to pump oil until the wells run dry. This contract dates back to the early days of the TAPS oil pipeline’s beginnings. Each of the oil companies that signed on to that contract promised, in writing, to set aside dollars for every gallon sold to the end buyer. The contract included a requirement to report and disclose the amounts collected in the annual reports from each of the companies who signed on to the contract. Because they have not all done so, it is not clear what the value of the contingency funds are at present, but the estimates are that they are immense, so much money that the oil companies would not walk away from these dollars. An important provision of the Fair Share Act is that it requires full, public disclosure of all financial details from big oil on the production of Alaskan oil, information that Alaska needs to be certain that Alaska is being fairly compensated for our oil.
Another reason why big oil is not going to leave Alaska is that it is obligated by the TAPS contract to remove the pipeline and put the land back to its pre-pipeline, pristine condition if and when it leaves the Alaska oil fields prior to the wells running dry. In other words, if it simply says “we are out of here” and leaves the state prior to having pumped the last drop of oil, it has to dismantle the pipeline entirely from one end to the other (803 miles), remove all signs it was ever there, remove all structures, buildings, equipment, etc. and restore the land to pristine pre-pipeline conditions. Estimates are that this would be extremely expensive to do.
Big oil advertises that they provide jobs, pay high wages and provide significant benefits (all true) to their workers in the oil fields, as reasons why Prop 1 should not be passed. What they forget to mention, however, is that a very large percentage of those wages are paid to workers who commute to their oil field jobs by plane rather than live in Alaska. Just over 37% of those good jobs benefit other states via wages paid to workers who live outside (Source: AK DOL 2016). These wages and benefits paid to commuter workers living outside leave almost no economic footprint in Alaska as a result.
Another detail that the big oil companies have failed to mention is that since SB21 was passed in 2013 under Governor Sean Parnell, (a former oil executive from outside) Alaska has lost more than 5,500 oil industry jobs. SB21 promised to add jobs, but exactly the opposite has happened.
In addition, under current oil tax law, royalties paid to Alaska are calculated on net income, after expenses. Wages are expenses, so Alaska is, in effect, paying part of these wages, including those paid to workers living outside. That means that Alaska is subsidizing the payroll which reduces the royalties paid to Alaska, for Alaskan’s oil.
The bottom line is that big oil has a really sweet deal here in Alaska, one it does not want to walk away from and will not walk away from. It would cost too much to shut down, stop pumping oil, dismantle the pipeline, restore the land to pristine condition and forfeit the fortune set aside as a contingency to prevent exactly that, plus give up the most profitable source of oil it has available, your oil.
Don’t be fooled by big oil. They can threaten and bluff and have been doing so since the 1970’s, but they need Alaska’s oil. It is the best deal out there for them. They may transition over to new technologies and new energy sources such as natural gas which Alaska has in abundance. They may hire, fire and retrain workers throughout the ups and downs of economic cycles in energy and Alaska’s economy, but the Fair Share Act is not going to run them out of Alaska. It is too profitable a deal for big oil and they will not walk away from their best customer.
Today, Alaska is “net negative” in oil royalties, which means that we are paying more for tax credits that we give to oil companies than they pay to Alaska in royalty income. We are literally giving them our resource, for nothing. You, the owners of the oil they pump, are not getting your fair share. If you did get your fair share, Alaska could support a “full” dividend as well as essential services. You and I, our families, friends and neighbors, would not have to tolerate paying subsidies to highly profitable oil companies at the same time that our state budget for essential services like education, ferry service, public safety, health care and far more is being cut to the bone. Voting YES for the Fair Share Act is a reasonable, fair step towards solving our fiscal problems in Alaska. It is not a partisan issue; it’s a fairness issue, a stewardship issue. It’s your oil. Let’s stop giving it away. Let’s get our fair share of the wealth it produces for big oil and should produce for the state of Alaska. Vote YES for Prop 1, the Fair Share Act, on Nov 3.
Mary Lynne Dahl
About:Mary Lynne Dahl is a Certified Financial Planner™, local business owner, published author and longtime investment advisor who lives in Ketchikan with her husband Jim Dahl and their two very busy boxer dogs, Sunny and Lizzi.
Received September 04, 2020 - Published September 06, 2020, 2020
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