Oil Production Tax in Alaska: an Evolution Away from a "true" Production Tax

• Publication year: 2017

§ 34 Alaska L. Rev. 319. OIL PRODUCTION TAX IN ALASKA: AN EVOLUTION AWAY FROM A "TRUE" PRODUCTION TAX

Alaska Law Review
Volume 34, No. 1, June 2017
Cited: 34 Alaska L. Rev. 319

OIL PRODUCTION TAX IN ALASKA: AN EVOLUTION AWAY FROM A "TRUE" PRODUCTION TAX

Andrew C. MacMillan ^[*]

ABSTRACT

Alaska has long relied on taxing petroleum extraction as a key source of funding for the State. The oil production tax has changed dramatically since the first barrels of oil were taken from Alaskan land. Most noticeably, the production tax has adjusted its progressivity element and has moved from a gross tax to a net tax. This Note provides a historical reference to Alaska's oil production taxation scheme in an effort to address whether it is a "true" production tax. Asserting that Alaska has departed from a "true" production tax scheme insofar as it more resembles an income tax, this Note assesses whether the State should return to a "true" production tax.

INTRODUCTION

In 2013, the Alaska state legislature passed Senate Bill 21 (commonly known as the More Alaska Production Act, or MAPA), which significantly overhauled the state's oil taxation scheme. Alaskans opposed to the bill viewed MAPA as a victory for the oil production companies, and quickly mobilized to gather enough signatures to put the repeal of the bill to a public vote. ^[1] Although the repeal effort ultimately failed, ^[2] it brought the merits of the oil production taxation scheme to the forefront of the Alaskan civic discourse.

MAPA, however, was not the first major Alaskan oil production tax overhaul in recent history. The Alaskan legislature previously enacted the Alaska's Clear and Equitable Share (2007-2013) (ACES) and the Petroleum Profits Tax (2006-2007) (PPT), both of which, like MAPA, intended to fix inadequacies in the previous tax scheme. These laws, however, quickly proved to be inadequate themselves. This Note will consider the evolution of the Alaskan oil production tax. Specifically, this Note considers the evolving structure of the production tax-primarily concerning the progressive rate additions and the move from a gross production tax to a net production tax. Ultimately, this Note concludes that Alaska's oil production tax is no longer a "true" production tax- instead, it now resembles an income tax.

Recently, Alaska's state budget crisis has renewed debate on the merits of the current oil production tax scheme. With no state personal income tax and no state sales tax, Alaska is one of the least taxed states in the country. ^[3] This is largely due to the state government's ability to rely on taxing oil producers for the extraction of Alaska's abundant oil resources. ^[4] Unique to the state, taxes on oil and gas have regularly made up around 90% of the state government's non-federal revenues. ^[5] And, not only have Alaskans paid little tax to the State, but "[o]il money [has been] so plentiful that residents receive[] annual dividend checks from a state savings fund that could total more than $8000 for a family of four- arriving each autumn, as predictable as the first snowfall." ^[6] In recent years though, the price of oil has dropped precipitously, leaving the State in severe need of more revenue. ^[7] Consequently, the State cut general fund spending by around 40% between 2014 and 2017, from over $7 billion to approximately $4 billion. ^[8] Because oil has long been the main source of revenue for the State, many policymakers see reforms to MAPA as a solution to the budget crisis. ^[9]

However, before changing the oil tax scheme again, it is worth exploring how Alaska's oil production tax evolved into MAPA. Principally, this Note highlights two tensions that become apparent as the production tax has evolved. First is the tension between ensuring revenue for the State while also providing a sufficient amount of profit for the oil industry to incentivize sustainable investment and production. A second tension is that between principles associated with a production tax and principles associated with an income tax.

Part I of this Note divides the history of oil production taxes in Alaska into five periods and examines the legislative histories behind each. Part II discusses the different types of production taxes and then synthesizes the evolution of Alaska's oil production tax, specifically its consistency with a "true" production tax. Part III considers whether Alaska should move back to a "true" production tax. Finally, this Note concludes that Alaska's current oil taxation scheme resembles an income tax more than a "true" production tax.

I. HISTORICAL EVOLUTION: THE FIVE ERAS

A. Pre-ELF Era (1955 to 1977)

Oil claims in Alaska date back to the 1890s on the Iniskin Peninsula. ^[10] By 1911, the first wells in the territory began to yield substantial amounts of oil. ^[11] While petroleum production looked promising, the high costs of transportation and operation in Alaska hindered production. ^[12] The federal government helped develop the industry by passing the Mineral Leasing Act, which resulted in the issuance of around 400 exploration permits in the territory. ^[13] Nevertheless, none of these permits were profitable, given the low oil prices and high production costs at that time. ^[14] Oil production continued to develop slowly over the next thirty years. ^[15]

Despite slow development in production, increased interest in oil led the territorial government to explore legislation for both the regulation and taxation of oil. ^[16] After the 1955 legislative session ended without a general appropriation bill, the territorial governor called the legislature back into an extraordinary session. ^[17] Possibly based on Oklahoma's production tax, the legislature passed House Bill 7, which taxed oil production at 1% of the gross value of production-the value of the resource not factoring in operating costs (labor and capital expenditures). ^[18]

In the 1960s, major oil discoveries in Cook Inlet produced over $200 million worth of oil and gas. ^[19] As a consequence of the production and conservation tax schemes in place at the time, this production provided the State with around $2,044,000 in total revenues. ^[20]

This original 1% of gross value production tax remained unchanged until 1967. ^[21] That year, a flood devastated Fairbanks, and the legislature appropriated relief to the victims and the city. ^[22] So began Alaska's history of funding a wide range of state expenditures through oil revenue, as the legislature added an additional 1% "emergency" production tax to the already existing "general" tax of 1% of gross value. ^[23] In 1968, the legislature increased the "general" oil production tax by an additional 2%. ^[24]

New oil discoveries toward the end of the 1960s completely changed the trajectory of oil in Alaska. In addition to the dramatic increase in production and profitability in Cook Inlet, the Prudhoe Bay oil field was discovered in 1968. ^[25] Prudhoe Bay currently ranks in the world's top twenty largest oil fields and is the largest oil field ever discovered in North America. ^[26] A 2009 legislative review celebrating the fiftieth anniversary of statehood noted the importance of this time period and concluded:

The discovery at Prudhoe Bay and subsequent discoveries at other Alaska oilfields . . . created jobs for thousands of Alaskans and provided funding for many of Alaska's programs, developments, and services. Many consider oil to be not only one of the most important discoveries in Alaska history, but one of the most important in the history of the United States. ^[27]

Amid the spectacle of this grand discovery, state legislators began to realize the true magnitude of Alaskan oil and, more importantly, the potential windfall for Alaska. ^[28] In 1969, House Bill 75 was introduced in the legislature "as a comprehensive approach to oil . . . taxation." ^[29] The bill was a dramatic shift from the initial percentage of gross revenue regime insofar as it implemented a progressive rate structure based on average daily production per well. ^[30] The new regime, passed in 1970, taxed 3% on the first 300 barrels per day, 5% on the next 700 barrels per day, 6% on the next 1500 barrels per day, and 8% on production over 2500 barrels per day. ^[31] The tax applied to the gross value-the market price minus transportation costs (marine shipping and Trans-Alaska Pipeline System tariff), but not operating costs like labor and capital-of individual wells. ^[32] For example, if the market price of oil were $50 per barrel while marine shipping cost $3 per barrel and the Trans-Alaska Pipeline tariff cost an additional $6 dollars per barrel, gross value would be $41 per barrel: market price ($50) less marine shipping ($3) and the tariff ($6). In this case, the first 300 barrels per day, which would be taxable at a 3% rate, would yield $1.23 in taxes per barrel. The next 700 barrels, taxed at 5%, would yield $2.05 in taxes per barrel, and the next 1500 barrels, taxed at 6%, would yield $2.46 in taxes per barrel, and so on. Thus, a company that produced 2000 barrels in a day would be taxed $4264 for that day's production.

Over the next seven years, the legislature twice amended the production tax scheme to (1) "establish[] a minimum oil production tax based on cents per barrel," and (2) "revise[] the stair step rate schedule to lower production levels." ^[33] Nevertheless, the basic "stair step" production tax...