Time for alarm? What will the governor do about State tax policies?

• Author: Bradner, Mike
• Position: OIL & GAS

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Gov. Sean Parnell, now elected to his own first four-year term, will be asked to make good on his pledge during the campaign to reexamine the State production tax on oil. Many in industry complain that the State's high rate of taxes is discouraging new investment, and blame the tax policy, which Parnell inherited from former Gov. Sarah Palin, for a broad decline in industry activity on the North Slope.

Having stepped in to be governor after Palin resigned, Parnell, the former lieutenant governor, maintained he could see no reason to change the tax, but also expressed a willingness to consider "new ideas" if they could be justified. In general, though, he maintained the status quo and left tax policy to Revenue Commissioner Par Galvin, who Palin appointed. Last year, Parnell asked Galvin to review the tax last year as to whether it was "working as intended." Galvin reported late in the year that major changes were not needed, but did recommend what amounted to tinkering, an expansion of tax credits for in-field well work. Parnell proposed that change, but the Legislature did not adopt it except in Cook Inlet.

The governor changed his position in the closing weeks of the general election campaign, however. In a speech to the Resource Development Council, an Anchorage-based business group, Parnell proposed a change in the basic production tax, to "cap" the tax rate in an escalator formula in the production tax law to ease its effects at higher oil prices. The governor also suggested a new incentive for "technically challenged" oil developments, an example being the large heavy oil deposits on the North Slope.

In the heat of the campaign the governor was vague on details of his proposals would work. Industry officials were guarded in their reactions. Parnell's revenue commissioner, Galvin, later said no decisions have been made as to what point the cap on the tax would be effective. The Democratic opponent in the race, Ethan Berkowitz, immediately criticized Parnell's proposal as a late-campaign election ploy.

IS SILENCE GOOD?

For most of the campaign Parnell had been silent on any plan to change the State tax. However, now that the proposal is on the table there is an expectation he will follow through with one more bill, submitted to the Legislature in 2011. Whether just "capping" the tax in the escalator formula will be a significant enough change to ease the negative effects of the overall tax remains to be seen. Industry is also awaiting details of his other proposal, on incentives for heavy oil or other challenged oil projects.

The State production tax on oil (there is a separate tax on gas) imposes one of the world's highest tax rates on "marginal" new oil investments and also places a high rate of tax on all oil production. In this context, a marginal investment is an investment in a new project, as a new set of wells or new field development where the State tax is considered on that specific project. Alaska's net profits-type production tax tends to treat each new investment differently because of differences in costs of...