The dispute over Production Tax Credit reform in 2016 - The Straight Scoop
A primary issue for the state is how to achieve fiscal stability and a sustainable
budget. One of the largest components is the expenses created through the oil
production tax credit system. The Cook Inlet revisions that I proposed have been
questioned on radio programs by my Homer opponent. She stated that I should not
have put these credits on the "chopping block" because they are related to Kenai
Peninsula oil jobs, and on a Kenai radio station she indicated it was inappropriate
for a peninsula legislator to vote for diminishing Cook Inlet tax credits because of
the related jobs. I want to explain to Peninsula residents these tax credits so you
can judge for yourself if reform was appropriate.
There are slightly less than 1,000 full time oil and gas jobs on the Kenai but they
are some of the best paying jobs, and across the state, average almost $140
thousand per year. A hold-over from the old 1990's ELF oil tax system was a
ZERO tax rate on Cook Inlet oil and only 17 cents per 1000 cubic feet of gas. This
generates about $5 million per year in Production tax. In fiscal year 2015 (July 1
2014 - June 30 2015) you paid $404 million in Cook Inlet production tax credits.
Yes, that's correct. As a resident your bank account paid cash Production Tax
Credits to companies doing work in Cook Inlet the equivalent of $404 thousand for
every oil and gas job on the Peninsula. That is almost three times the total wages
paid. The fiscal year that just ended was less. But at $275 million (equivalent to
$275 thousand for each $140 thousand job) it will still be roughly twice the entire
industry Peninsula wages. Cook Inlet has the world's highest natural gas price
which fully supports the economics of any Cook Inlet gas project that has a market.
Only projects that have no market for their product 'need' this massive tax subsidy
to be developed. Are jobs that are more than fully subsidized by the state really
government make-work jobs?
The Cook Inlet situation was particularly bad because essentially no tax was paid
from which some revenue could be used as the credit incentive. North Slope
production tax could be used to pay the credits in Cook Inlet in the past. However,
the new SB 21 system (which voters did not veto in 2014) combined with low oil
prices for the next several years means there will be almost no production tax from
the North Slope to even pay those tax credits, much less subsidize those from Cook
Inlet. The tax credit law established a separate fund with 15% of all yearly
statewide production tax deposited there from which to pay credits and it only
received $30 million last year.
I and others proposed rapidly ramped down reductions and elimination of the Cook
Inlet credits by the end of 2017, and similar restriction and reduction in the rate of
North Slope credits. That bill, HB 247, passed the House with 13 majority and 12
minority votes. Unfortunately, the Senate slowed the Cook Inlet credit ramp down
(costing you about $20 million extra) and kept the entire expensive credit system
on the North Slope. The tax/credit system is split between the large producers
versus the small or nonproducing companies. The Big Four (Exxon, BP, C/P and
Hilcorp) can use credits to reduce their production tax payments to zero under the
circumstances projected for the next several years. The small companies still will
generate cashable credits at 35% of their exploration and development expenses.
These small oil companies will not have any production for years so pay no
production tax, yet all their expenses generate a net operating loss which receives
the 35% tax credit redeemable for cash. They are clamoring for Alaska legislators
to dip into your savings accounts and advance pay those cashable production tax
credits now, even though there is little production tax from anywhere in Alaska.
From my perspective as a fiscal conservative, there is much more work for the next
legislature to get our fiscal house in order and further reduce this huge expense to
your state budget. I believe reducing our expenses by reducing the credit system is
totally appropriate for any legislator who is looking out for your state savings and
Rep. Paul Seaton, State House District 31