Alaska revenue to fall $2 billion after oil tax cuts take effect

December 6, 2013

A tax bill passed with support from Gov. Sean Parnell (R) will cost Alaska $2 billion next year (Mark Thiessen/AP)

A new tax structure passed this year means Alaska will forgo about a third of the revenue it takes in from oil and gas production, according to new state estimates, dealing a serious blow to a state that relies heavily on the fossil fuel industry.

The Alaska Department of Revenue said in estimates [pdf] released Wednesday that the state took in $6.3 billion in petroleum revenue in fiscal 2013. Next year, the state will take in $4.3 billion from petroleum production, an amount that falls to $3.9 billion in fiscal 2015.

Oil and gas production tax revenue will be cut in half over the next two years, from $4 billion in fiscal 2013 to $2.1 billion in 2014 and $1.7 billion in 2015. Petroleum revenues will fall from 92 percent of the budget this year to 88 percent next year and 82 percent in 2015.

Gov. Sean Parnell’s (R) administration said the drop in revenue was a consequence of falling oil prices. But others pointed to a major revision to the state’s oil tax regime that Parnell pushed through the legislature earlier this year. By 2023, the department estimated [pdf] that it would take in $3.4 billion in unrestricted petroleum revenue — slightly more than half the $6.3 billion Alaska earned this year.

The reductions come after the legislature passed the More Alaska Production Act this year. The law, which takes effect Jan. 1, will increase the base tax rate on oil production from 25 percent to 35 percent, while eliminating a progressively higher tax on greater amounts of production. The measure replaced a capital investment tax credit with a per-barrel production tax credit and offers exploration incentives for the Cook Inlet and a production region known as Middle Earth.

The MAP Act rolled back a system of progressive taxation that had been pushed by Parnell’s predecessor, Gov. Sarah Palin (R). Palin’s 2007 legislation levied new taxes on larger oil producers, part of a response to corruption in state government and the oil industry.

Parnell and Republicans who backed the tax changes said the Palin-era taxes discouraged investment and production in Alaska. Oil production in Alaska peaked in 1988, at more than 2 million barrels a day; it has steadily declined since, and stood at just 526,000 barrels per day in 2012.

Lower production and lower prices were “not significant enough for the state of Alaska to lose close to $2 billion in revenue,” state Rep. Chris Tuck (D), who was briefed on the revenue projections on Wednesday, told the Anchorage Daily News.

Revenue Commissioner Angela Rodell said in a statement that the new tax regime has attracted investments from oil companies. The department expects an additional $10 billion investment in North Slope production over the next 10 years, Rodell said. The MAP Act allows companies to write off that investment, causing the blow to the state’s budget.

“Fundamentally, future growth in unrestricted state revenue will require higher oil prices and/or stable or increased production,” Rodell said in the statement. “Fortunately, with the More Alaska Production Act, we have a tax regime that can address the one factor we can influence – increased production.”

Alaska depends on oil tax revenue for about 90 percent of its state budget, and the $2 billion shortfall is likely to mean big cuts in state spending. The oil taxes mean Alaska doesn’t have to charge other taxes on its citizens; Alaska is one of eight states without a personal income tax, and one of four states that doesn’t have a sales tax.

While the recession forced some states to deplete their rainy day funds, Alaska has squirreled away billions in oil tax revenue. In fiscal 2013, the state retained a $16.1 billion reserve fund, enough to keep the state government operating at current levels for more than two full years, according to the Pew Charitable Trusts.

Reid Wilson covers state politics and policy for the Washington Post's GovBeat blog. He's a former editor in chief of The Hotline, the premier tip sheet on campaigns and elections, and he's a complete political junkie.
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