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That's a nice Christmas gift. Ketchikan waits anxiously each year about this time, just like the kids do for Christmas morning, to discover what the next cruise ship schedule looks like.

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With a drop in oil prices limiting revenue for state capital and operating budgets, Alaskans will have to think frugally for the time being.

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8/16/2014
It's about production

It's a time of changes for Alaska's oil-production tax.

This change will come in one of two ways:

Alaskans in Tuesday's primary election either vote no on Ballot Measure 1, or they vote yes.

A no vote preserves the newest changes in the production-tax system, known as Senate Bill 21 or MAPA (More Alaskan Production Act), which was adopted by the Legislature and signed by its sponsor, Gov. Sean Parnell, a year ago.

A yes vote rapidly — within 30 days — returns the state to the production-tax system that preceded SB21, which was called ACES or Alaska's Clear and Equitable Share.

Neither oil-production tax system is perfect, and, whichever prevails in the election, it should be adjusted or "tweaked." Both no and yes advocates use that word, and both agree that perfection in oil-production tax law won't be achieved with MAPA or ACES in their current form.

But, is one more perfect than the other for Alaskans? The simple answer might be: Depends on timing.

For example, ACES became law in 2007. Gov. Sarah Palin proposed the law; lawmakers adjusted it, and when all was said and done, Alaska was destined to receive a sizeable share of oil-production profits. Both the SB21 vote no and some vote yeses agree that the state received a favorable, albeit inequitable, share under ACES. At the time, Alaska headlines focused on corruption in some corners of the Legislature and the oil industry in Alaska. The share Alaska took through ACES undoubtedly was at least in part a punitive response to the industry's role in that corruption.

Alaska receives about 90 percent of its general fund revenue as a result of its partnership with the oil industry. That revenue spiked under ACES mainly because of higher prices and its progressive formula, which gave Alaska a large percentage of profits. The combination of the progressive and high-and-increasing oil prices filled state coffers. ACES proved to be well timed because, while other states suffered greatly during the recession that began in 2008, Alaska was buoyed by the additional revenue through ACES.

Not only do times change, but ACES' effect during high prices masked a concern for Alaskans. That concern: Since 1989 the amount of oil flowing through the pipeline has been declining. This means at lower production and lower prices, Alaska's revenue is in decline. This scenario foreshadows financial disaster under ACES.

The oil-production tax is responsible for most of the state's oil-related revenue, although the oil companies pay two other taxes, plus royalties to Alaska.

Alaska received about $2.1 billion in oil-production tax during the most recent fiscal year concluding June 30. Corporate income tax brought in $464 million and state property tax another $97 million. Royalties represented $1.68 billion. Royalties are the source of funds for the Alaska Permanent Fund.

Production must be addressed. Oil prices fluctuate, and even if oil prices reach the highest of highs of recent years, with lower production, there isn't as much oil coming out of the fields to be taxed, which would result in less revenue.

Less revenue translates into cutting state spending, and probably the state capital budget on which communities often depend to build and maintain infrastructure.

The vote no side says it believes that SB21 or MAPA addresses production declines in part by eliminating the progressive formula. It would return to the industry a larger amount of the profits, allowing it more financial capability to invest in Alaska's oilfields, which would result in increased production.

While eliminating the progressive formula, SB21 also increases the base tax rate from 25 to 35 percent. The new tax base would better provide Alaska with a steady revenue stream when oil prices fluctuate.

And, vote no says, if Alaska doesn't realize all the production and revenue it anticipates with SB21, then the law can be tweaked to recover whatever might have been lost. Alaska sets the production tax; it can re-set it any time.

The vote yes side says that eliminating the progressive formula returns too much revenue to the oil companies. Sen. Bert Stedman, who co-chaired the state Senate's Finance Committee for six years and opposed ACES when it was originally adopted, says an oil-tax system that would provide for a more steady, long-term revenue stream would be preferred — a variation between ACES and MAPA. Stedman also supports higher taxes in the older, legacy fields and lower taxes in newly developed ones, thus encouraging new production. SB21 doesn't accomplish that, he says.

As it is under current oil prices, the revenue doesn't differ much between ACES and MAPA. It's when prices rise or fall that the significant differences become evident. ACES, because of the progressive formula, realizes more revenue at higher oil prices, while MAPA's anticipated increased production would make it the best tax system at lower prices.

Both sides provide numbers as to what might happen with prices. Parnell's numbers have the advantage that the administration has access to oil companies' confidential taxpayer information.

Still, and unfortunately, but unavoidably, the numbers that would be most helpful are based on forecasts of what might happen in the oil industry. No one can predict with 100-percent accuracy, although they try mightily.

Both sides agree Alaska needs increased production. The no vote points to increased industry activity in the oil fields since SB21 became law. Vote yes figures that activity had been scheduled under ACES and only happened to coincide with the adoption of SB21 to illustrate the new law's effectiveness.

Which is correct? Only time will tell. If Alaskans support SB21 by voting no, then Alaska will be able to determine in the next few years whether the new law delivered by prompting increased production.

Then, if SB21 didn't, the Legislature can tweak the oil-production tax again — perhaps to revive the progressive formula in some fashion. If SB21 did, then the governor can take credit for prompting increased production.

As long as Alaska owns the oil, it does decide what the tax will be — now and later.

If Alaskans oppose SB21 by voting yes, then the Legislature had better immediately tweak ACES to encourage activity and its continuation at the oilfields. Because should Alaska's declining oil production meet up with low oil prices, the reaction will be devastating financially.

Either way, to differing degrees, tweaking is likely.

Ultimately, Alaskans need an equitable oil-tax structure — one that will both encourage investment for new production and provide a fair revenue return to Alaskans.

The structure will be a state issue as long as Alaska is in the oil business. To stay in business, it not only has to have oil, but it has to produce it in accord with the economic times.