A terrible time to increase oil taxes

by Jim Jansen and Joe Schierhorn
Jun 9, 2020

With the pandemic threatening our lives and our livelihood, oil prices at rock bottom, the loss of the visitor industry for the season and commercial seafood at risk, this is a terrible time to raise oil production taxes by as much as 300%.

Ballot Measure 1 is a vicious and dangerous attack on the future of our state. It sends the message that “If you invest here, we will increase your taxes every time we run out of money.”

People say this is an oil company issue. It’s not. It’s an Alaska issue. Oil companies can take their money and invest it anywhere in the world — and they will.

But where do the rest of us go?

This is where we have our homes, families, jobs and businesses.

This is where we plan a future for our kids and grandkids.

Where do we go when the pipeline shuts down, the jobs dry up, home values collapse and there is no one left to support our tax base, our charities and our economic way of life?

Other industries, like mining, tourism, seafood, and the many service businesses, will ask the question: Who’s next? Why would they want to invest here? Why would anyone invest in a state that is trying to kill itself?

Proponents of Ballot Measure 1 imply that the oil industry pays little or no taxes. That’s wrong. In the past five years, according to information provided in a prior article by oil economist Roger Marks, the oil industry paid an average of almost $3 billion per year in taxes and royalties and kept about $1 billion. That’s a government take of 74% of the pretax value. The Lower 48 government take was about 64%.

Increased oil production is the best solution to Alaska’s budget problems. The oil industry has plans to spend $24 billion over the next 10 years, which could boost our oil production by several hundred thousand barrels per day. This investment would stop — and oil production would decline to dangerous levels — if we overtax this important industry. Why risk driving away what a 2019 study by the McDowell group noted is a $5 billion annual payroll, 77,000 jobs, $4 billion in annual payments to Alaska businesses? This money runs throughout our economy and supports so many charities and events that provide needed services to so many in our state.

We are extremely concerned that if Ballot Measure 1 were to pass, it would begin an economic death spiral for Alaska. Our economy is fragile, and this initiative could tip us over the edge.

They call this the “Fair Share Act”:

• Is it fair that you will no longer have a job?

• Is it fair that your house will be worth less?

• Is it fair that your children will have little to no opportunity to stay and work in Alaska if this initiative passes?

• Is it fair that there is no industry left to pay for government services, our schools and support our charities?

A better name would be “The Job Killer Act of 2020.”

We have a choice:

• More oil or more taxes

• A strong economy or recession

• Jobs or no jobs

This is not the time to destroy what we have left in Alaska.

Jim Jansen is chairman of the Lynden Companies, a co-founder of the KEEP Alaska Competitive Coalition and member of the OneAlaska campaign. Joe Schierhorn is president and CEO of Northrim Bank, co-chair of the KEEP Alaska Competitive Coalition and a member of the OneAlaska campaign.

Success of Alaska’s oil and gas industry remains crucial to our economy

By Jim Calvin

The Trans-Alaska Pipeline, seen near Copper Center on Tuesday, September 9, 2014. (Loren Holmes / ADN)

Oil prices have plunged in the past few weeks, a result of global market forces and COVID-19. With jobs and government revenue sure to be affected, it is useful to consider how a drop in oil prices played out in Alaska before.

McDowell Group recently completed a comprehensive analysis of the oil and gas industry’s role in Alaska’s economy. For many years, we have tracked jobs and wages associated with industry spending and payments to government. This analysis was different, coming on the heels of a recession in Alaska driven mainly by a sharp drop in oil prices and revenues. Oil prices started sliding in late 2014, falling from $110 per barrel to $30 per barrel by 2016. Oil and gas industry spending and employment sank, as did tax and royalty revenue to the state of Alaska. All told, Alaska lost 12,000 jobs before emerging from recession in 2019. Like Alaska’s economy, the oil and gas industry is again on the rise, adding 500 jobs in 2019.

Though the oil and gas industry downsized during the recession — nationally and in Alaska — it remains a critical component of the Alaska economy. Oil industry spending supported 41,800 jobs and $3.1 billion in wages in 2018, including all multiplier effects. This tally of employment does not include nonresidents employed by the oil and gas industry in Alaska. The 17 companies that produce, transport, and refine oil and gas are the heart of Alaska’s oil industry, spending $4.4 billion in Alaska in 2018. In all, 84% of these companies’ employees are Alaska residents, earning 83% of oil industry wages paid in Alaska.

The industry also paid $3.1 billion in taxes and royalties to state and local governments in 2018. As government uses oil-related taxes and royalties to fund operations, programs and capital projects, thousands of public and private sector jobs are created. Government spending of oil-related taxes and royalties accounted for an additional 29,300 jobs and $1.5 billion in wages in Alaska. The Permanent Fund, and the dividends it generates for Alaskans, is a legacy economic impact of the oil and gas industry. PFD spending in Alaska supports 6,500 jobs and $260 million in annual wages.

All told, including jobs related to private sector spending and payments to government, the oil and gas industry accounted for 77,600 jobs and $4.8 billion in wages — 24% of all wage and salary jobs and 27% of all wages in Alaska in 2018. For each job with Alaska’s 17 oil and gas producers, pipeline companies and refineries, there are 15 additional jobs in the Alaska economy connected to the oil and gas industry. No other industry in Alaska can match the employment footprint of the oil and gas industry.

Alaska oil production has been declining steadily since 1988, when we produced 25% of all U.S. oil. Now Alaska accounts for 4% of domestic U.S. production, and just a small fraction — 0.6% — of global production. While U.S. oil production outside Alaska grew 143% between 2008 and 2018 — largely due to rapid growth in North Dakota, Colorado, Texas, New Mexico, and Oklahoma — Alaska production declined 30%.

Recent history has proven that a healthy oil and gas industry is essential to Alaska’s economic well-being. That fact, coupled with our much-diminished role as an oil producer and another severe drop in oil price, underscores the importance of keeping Alaska an attractive and competitive place for oil industry investment.

Jim Calvin is McDowell Group’s senior vice president and senior economist. McDowell Group is Alaska’s oldest and largest full-service research and consulting firm.

The oil tax initiative: Fair for whom?

By Roger Marks

The 800-mile Trans-Alaska pipeline snakes its way across the tundra north of Fairbanks. (AP Photo/Al Grillo, File)

Alaska’s constitution provides for “utilization, development, and conservation of … resources … for the maximum benefit of the people.” What is maximum benefit? Cash to the state? Short-term cash? Long-term? Jobs? Income? Environmental quality? Who knows?

Then there is the idea of the state getting its “fair share.” What is fair? For eons, philosophers, theologians, lawyers, economist and countless others have pondered this. There is currently a ballot initiative to raise oil taxes called “The Fair Share Act.”

Most economists would say fairness entails taxes being competitive; taxpayers should pay a similar amount to what they pay in other similar places. Otherwise investment will go elsewhere and production suffers. As measured by percentage of net pre-tax profits going to the state and federal government, the current system is competitive. (Including the “credits,” which do not really function as credits, but rather provide progressivity to the system.)

Presently, the state alone is getting 45% of the net profits at current prices. It would get 64% under the initiative. (These calculations are mine, based on public data.)

On their website, the initiative sponsors call for gross revenues (market price less transportation cost) to be split one-third each to the state, the federal government and the taxpayers. Ascribing and measuring shares of gross revenues going to the three entities makes no sense. Currently, gross revenues are about $50 per barrel. Half of this are upstream development costs; this share of gross revenues go to no one, but is incurred by taxpayers. Per the sponsors’ approach, if you spend $25 to develop oil and sell it for $50, you’ve made $50.

In an Aug. 2018 op-ed, the initiative sponsor lamented that between 2009–2015, taxes had declined from $12 per barrel to $2 per barrel even though oil prices had stayed similar. What was not mentioned was that between those years, upstream costs had increased from $17 per barrel to $40 per barrel. So even with the lower taxes, taxpayers’ after-tax profits were $10 per barrel less.

Most moralists would agree that for something to be fair it needs to be fair to both sides. Generally in the world there is a basic risk/reward symmetry between how taxpayers and governments share downside price risk and upside potential. Either the taxpayers assume downside risk and realize upside potential, or the government does.

The initiative raises taxes at low prices, high prices, and in-between. At prices under $45 per barrel the taxpayers would lose money while the state makes several dollars per barrel. At high prices, the marginal tax rate would be 70%. The taxpayer assumes the downside risk and the state gets the upside potential. It is a classic “heads I win, tails you lose” scheme.

As easy as it is to be cynical about laws that are the outcome of the legislative process, they could be much worse. At least that process provides many checks and balances to the initial subjectivity of a single legislator that may be embedded in early drafts.

For a bill to become a law it will be reviewed by a number of legislators in the initial committee, be analyzed by experts, receive public input, go on to other committees, the body as a whole (House or Senate), and go through the same process in the other body. Along the way, there are exchanges of ideas and the proposition is modified.

In the end, it will be subject to a multiplicity of perspectives and information. The initial favoritism gets tempered. This ultimately results in decisions that are better than could have been made by any single member.

That is the problem with ballot initiatives. They are statutes drafted by a small number of like-minded sponsors. If passed, the Legislature cannot touch them for two years. It’s “take-it-or-leave-it” lawmaking without the balanced review good legislation needs.

The initiative sponsors have not stated what is fair, how they justify it, how they measure it or how the initiative attains fairness. They better have some basis, because economically it is a mess.

Roger Marks is an economist in private practice in Anchorage. He formerly served as a petroleum economist with the Tax Division in the Alaska Department of Revenue.