CHAPTER 12 STATE TAXATION

• Jurisdiction: United States

Alaska Mineral Development
(Sep 1978)
CHAPTER 12
STATE TAXATION
THOMAS K. WILLIAMS
PETROLEUM REVENUE DIVISION DEPARTMENT OF REVENUE
ANCHORAGE, ALASKA

FOREWORD

The past several years have witnessed a fundamental, and in some senses revolutionary, restructuring of Alaska's system of taxation as it applies to the oil and gas industry. These major changes conclude a decade of innovation and experimentation in an effort by the State to find a comprehensive and effective tax structure for this most complex and sophisticated industry. This evaluation has not come about easily, nor has it been without controversy and debate.

In order to understand where Alaska stands now and where we may be going in the future, it is necessary to understand some of the factors and considerations that have brought these changes about. Accordingly, this presentation divides itself naturally into two parts: first, a review of where we are now and how we got here; and second, an analysis of where we seem to be headed, based on the adequacy of the present structure both to fulfill the State's revenue needs and to satisfy the socio-political forces for change.

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I. OVERVIEW OF THE DEVELOPMENT OF ALASKA'S PRESENT TAX STRUCTURE.

No less than seven kinds of taxes play, or have played, major roles in the State's taxation of oil and gas: the mining license tax, production taxes for conservation, a "regular" production tax, an ad valorem tax on oil and gas "hardware", a reserves tax, the corporate income tax and the gross receipts tax. In addition Alaska has a state motor fuel tax, and various municipalities have their own ad valorem and sales taxes. Alaska has no statewide sales tax.

A. Mining license tax.

Taxation of the mining industry, and by implication oil and gas, is as old in Alaska as the original Territorial government. Until 1913 Alaska had been administered by federal agencies without formal participation by the residents of the Territory. But in 1912 Congress authorized limited self-rule, including an elected Legislature. Elections were held that November, and in March 1913 the First Territorial Legislature convened in Juneau. Among the most pressing matters facing those legislators was the need to establish sources of revenue. As Governor Clark wrote in the first "State of the Territory" message,

"...the necessity exists for approaching the subject of taxation early in the session. The importance of early steps is readily appreciated in view of the fact that there is at present no territorial treasury or other repository of funds which can be drawn upon by order of the legislature; and, furthermore, that no act of the legislature requiring the expenditure of money can be executed until revenue be provided for administering the law."¹

For nearly two months the House Committee on Ways and Means examined the various possibilities, and on the evening of April 30, it introduced House Bill 94, which would impose license taxes on a number of activities including "mining". In a remarkable display of legislative celerity, this bill passed the House and was transmitted to the Senate, where it was amended; it was then returned to the House, which refused to accept the amendment; the Senate declined to recede from its amendment; a free conference committee was appointed, and a compromise was struck and approved by both houses — all in time for the governor to sign the bill into law the very next day after its original introduction.²

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This original enactment was not the legislature's final word on the mining license tax, by any means. Bills affecting the mining license tax were passed into law by each successive Legislature through 1927.³ In all, no less than 19 separate enactments have been made since 1913, including eight changes in the rates.⁴ This volatility in the mining license tax seems to have been largely forgotten during the long interval since the last rate change (1955) or the last change of any kind in this tax (1962). But the record shows a past history of legislative revision and adaptation of an even more sustained duration than the one we have been witnessing with oil and gas.

Originally levied at a flat rate of one-half of one percent of net income, the mining license tax incorporated a progressive rate structure in 1923,⁵ eventually achieving a peak in complexity with nine tax brackets and a separate tax structure for gold, platinum, palladium and other metals of the "platinum-palladium group".⁶ Today there are only three brackets — three percent of net income over $40,000 but not over $50,000; $1500 plus five percent of net income over $50,000 but not over $100,000; and $4000 plus seven percent of net income over $100,000 — and there are no groups of metals or minerals having special rates.⁷

Since 1962 the mining license tax has not applied to oil and gas.⁸

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B. Production taxes.

Serious and concerted exploration for oil and gas in Alaska renewed itself during the 1950s. In 1954 the Bureau of Land Management had issued 272 oil and gas leases covering over half a million acres of land. That, plus the fact that three companies had already begun drilling wells on their new leases, was deemed sufficiently auspicious as to merit inclusion in Governor Heintzleman's "State of the Territory" address of January 26, 1955.⁹

In hopeful anticipation of commercial discoveries, the 1955 Legislature enacted a comprehensive oil and gas conservation statute.¹⁰ To help defray the expense of administering this new law, the Legislature provided in section 17 of the bill for a conservation tax of five mills for each barrel of oil produced and every 50,000 cubic feet (50 Mcf) of gas.¹¹ The proceeds from this source originally went into a special conservation fund.

When the 1955 Legislature adjourned without having passed a general appropriation bill to fund the territorial government during the next biennium, they were immediately summoned back by the governor into an Extraordinary Session beginning March 28, 1955.¹² Apparently drawing from Oklahoma's virtually identical production tax law, the House Rules Committee introduced House Bill 7 on April 2nd, providing for an oil and gas production tax of one percent of the gross value of production. The bill went to the floor the same day, where it was amended to say that the production tax was in lieu of state or local taxes on the production property and equipment. It then passed the House, and the next day passed the Senate without further change. The governor signed it on April 6, 1955.¹³

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These actions proved to have been timely taken. On September 29, 1957 the Swanson River oil field was discovered onshore in the Kenai National Moose Range. A second major field, this time a gas field, was found just south of the city of Kenai on October 11, 1959. The first offshore oil field was discovered in Cook Inlet in 1962, and three more were found in 1965. By the end of 1966 these fields had produced oil and gas worth over $202,786,000 and had provided the State with some $2,044,000 in total revenues from the production and conservation taxes.¹⁴ Besides this income, the State had also been receiving lease rentals, bonus bids, royalties and shared revenue from federally leased acreage. Total direct oil and gas income to the State totalled nearly $19 million in 1966 and $135 million from 1959 through 1966.¹⁵

All during this time no changes had been made in the tax structure. Then, in 1967, Fairbanks was struck with a devastating flood. The Legislature was convened in a Special Session to provide appropriate statutory relief to the victims of this disaster. Faced with the extra costs of these emergency programs, the Legislature turned to the oil and gas industry for some of this money by enacting a one-percent disaster severance tax based on the gross value of production.¹⁶

That the State should pass an emergency tax in the wake of a natural disaster is not surprising, nor did it necessarily reflect any significant departure from the laissez-faire attitude that had prevailed in the area of oil and gas taxes since 1955. However, events were by that time already in progress that would lead to an altering of that attitude.

The first of these occurred in Cook Inlet. The three oil fields discovered offshore in the Inlet in 1965 all came on stream during 1967, increasing tremendously the State's direct oil and gas revenues.¹⁷ However, as they came into production, a number of anomalies appeared among the prices reported to the State by various producers. With production from the Inlet burgeoning, the revenues from it became too important for these differences to go unnoticed. To head off any legislative stampede on this issue, Governor Walter J. Hickel proposed to the 1968 Legislature that a comprehensive study of the appropriate degree of taxation be undertaken. As his Commissioner of Natural Resources, Thomas E. Kelly, testified to a joint hearing of the House and Senate Finance Committees,

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"The preceding testimony vividly illustrates the problems and complexities involved in the determination of an optimum and equitable production tax rate — a rate which should be designed to maintain the highest level of tangible (capital) and intangible investment consistent with maximum revenue to the State.

"...An arbitrary decision, without careful analysis, will undoubtedly incorporate mistakes which will be difficult, if not impossible, to undo.

"Cognizant of this situation, Governor Hickel has clearly and logically requested that a broadly-based tax study be undertaken this year, and accordingly, has asked the Legislature for an appropriation to accomplish this study. I think that this is the only rational approach to solving our tax needs. It is certainly not intended as a stall, or to accomodate any special interest groups, but to make sure that short-range expediency does not overshadow long-range tax objectives...