Oil Credits

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 budget.