Leaders of the Alaska House of Representatives, including House Speaker Mike Chenault, are questioning whether Alaska’s high tax rate on oil and gas is hampering new exploration.
“We think that there are some issues there with the ACES language and we’d like to get some clarifications so that we can determine if the legislation is working properly, or if we need to make changes,” Chenault said. “We’re focusing on how it affects job opportunities and exploration opportunities today versus 2007, when the tax was enacted.”
ACES is the Alaska Clear and Equitable Share statute, Alaska’s oil and gas production tax law.
Chenault and 14 others in the Republican Majority of the in the 40-member state House sent a letter Dec. 4 to Gov. Sean Parnell, a Republican, asking the governor to examine the tax.
The move indicates a likely battle over the tax when the Legislature convenes its 2010 session in January. Parnell, who took office last summer when former Gov. Sarah Palin resigned, inherited the tax system and much of oil and gas tax policies of the Palin’s administration, including the ACES tax.
In the letter legislators said they are concerned over slowing industry activity and cited ConocoPhillips’ recent decision to cease onshore exploration in Alaska in favor of offshore, where state taxes do not apply, and BP’s reduction in its 2010 capital spending plans, as examples of adverse impacts of the tax
BP and ConocoPhillips both have said recently that the Alaska tax, coupled with high costs of working in remote areas, creates a poor investment climate in the state.
The four-page letter presents nine questions to the administration concerning the production tax, asking for information in industry bidding in state lease sales, oil and gas employment numbers and requests for new drilling permits and rig counts.
Drilling on new production wells and particularly exploration wells has been in a decline since 2007, when the revised state tax was passed, and industry officials have complained that the high state tax rate, which can exceed 70 percent, is partly to blame.
“There is mounting evidence that ACES may wind up doing more harm than good to future oil development. That possibility needs to be examined as quickly as possible,” the letter said.
“My district in particular has been hit hard by job losses as a direct result of the actions of government,” House Resources Committee Co-Chair Craig Johnson, R-Anchorage, said. “It is critical that we identify the reasons the tax increases in ACES have stifled investment and correct those oversights as quickly as possible.”
Alaska’s production tax statute imposes a base tax rate of 25 percent tax on producers’ net profits, but a formula in the tax statute increases the rate as crude oil prices rise. At $70 per barrel crude oil prices the average tax rate is over 50 percent of net profits.
If oil prices were to increase over $100 per barrel to tax rate could reach as high as 85 percent, according to Roger Marks, a retired state economist who helped develop the state net profits tax.
Prior to 2006 the state had a production tax on gross revenues but changed that year to a net profits tax. In 2007, as oil prices increased sharply, the
Legislature raised the tax rate and inserted a formula that automatically ratchets up the tax as oil prices climb.
