Oil reform requires fiscal reform.

• Author: Keithley, Bradford G.
• Position: OIL & GAS

Any opinions expressed her in are the author's own.

Most Alaskans are familiar with efforts by Governor Parnell the last two years to reform Alaska's current oil tax structure. The most recent effort ended earlier this year, when the Governor withdrew the revised oil tax reform bill that he had submitted at the beginning of the special legislative session.

What many are not aware of is something that happened at the end of the special session, immediately before the Governor withdrew the bill.

The Office of Management and Budget is the state agency responsible for preparing and administering the state budget. In an appearance before the House Resources Committee, the head of OMB, Karen Rehfeld, testified that if the Governor's tax reform bill passed, the reduction in revenues could cause the state budget, which otherwise was projected by OMB to run a surplus for several more years, to turn to a deficit virtually immediately.

Rehfeld estimated that the deficit would be roughly $615 million for Fiscal Year 2013, which began July 1, 2012. If all other things remained equal, Rehfeld estimated that the annual deficit would grow to roughly $1.03 billion by Fiscal Year 2018.

The Governor withdrew the bill later the same day.

Some took Rehfeld's testimony as an indication that the Governor's proposed oil reforms were overly generous. For example, Senator Bill Wielechowski, an opponent of the Governor's plan, said at the time that Rehfeld's testimony "makes crystal clear the disastrous impact the Governor's bill would have on the state treasury."

Actually, Rehfeld's testimony showed the reverse, what a disastrous impact recent state fiscal policy is having on Alaska's ability to regain competitiveness in the oil industry.

Axed Investment, Exploded Spending

In 2007, Governor Palin and the Legislature passed significant revisions to Alaska's oil tax, termed "Alaska's Clear and Equitable Share," or "ACES" for short. By some estimates, ACES increased oil taxes by 400 percent and many have argued that ACES has significantly diminished Alaska's competitiveness in attracting new oil investment.

Prior to the passage of ACES, Alaska state spending was relatively moderate. During Fiscal Years 2004 through 2006, for example, spending from the General Fund was only $2.3 billion, $2.3 billion and $3 billion.

After the passage of ACES, however, state spending exploded. Spending from the General Fund for Fiscal Year 2008, the first year following the passage of ACES, was $4.25 billion...