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Alaska must do a thorough, independent review of the oil tax regime

John Havelock, Alaska Dispatch News, Opinion, July 25th, 2015

In a time when all Alaskans must suck it up and face a reinstatement of an income tax, it is also a time to do a thorough review of the appropriate tax structure for oil and gas.

The oil industry can’t be blamed for avoiding taxes. It’s the American way. But if the Alaskan public is not to be spun around a cylinder on a spiral ridge by artful corporate tax dodgers, the technically educated in the state government and their community colleagues had better pencil down hard.

The moment is in the realization that the current model for state financial survival won’t work, as we have lately been reminded by the powerful credit-rating agency Moody’s. The governor’s conference on the fiscal situation earlier this summer in Fairbanks left the same impression, though it went easy on the variable role of oil taxes.  Perhaps the conferees were more accepting of the notion, beloved by the Big Three (ConocoPhillips, BP and Exxon Mobil), that the voters’ narrow rejection of the referendum proposing to repeal SB 21, the bill which established the current tax regime, ended all discussion of the oil revenue contribution.

Even if you accepted the notion that a bill passed only by the votes of legislators who were also oil company employees didn’t need a new look; even if you were not bothered by the enormous sums that were spent by the Big Three, directly and indirectly on advertising, much of it misleading, to assure the defeat of the referendum, new evidence should change your mind. Recent information reveals that the production and discovery rebates of the bill have already taken hundreds of millions from state revenue with no showing of a state benefit. Surely this requires a new look at the whole oil tax situation.

Of course the industry giants are filing state tax returns. Is the state working a prompt, thorough audit? Unlikely. Human resource talent for these jobs is scarce. State audit budgeting is tight — hmmm. On the other side, fiddling with returns to minimize taxes, also very American, employs many accountants.

The record of the industry for avoiding Alaska’s taxes actually due is phenomenal. Many billions of dollars have had to be recovered by the state in annual audit demands and litigation, mostly settled, but when did an oil company settle without thinking it was getting a better deal than the judge would give it?

In a time when the rest of us are being asked to scrape up new revenues out of service cuts and to spend savings, surely many factors suggest a fresh look at oil taxation. Prudhoe Bay and neighboring fields are still surprisingly profitable to the Big Three as indicated in reports required to be filed with the federal Securities Exchange Commission. Those that can spread their profit sources add a chunk from enhanced pipeline profits, another from shipping and another from refining. We want them to profit, but as the Alaska Constitution states, the development should be “for the maximum benefit of the people.” That means that the profit must be reasonable under the circumstances.

“Reasonable” is a pretty flexible word. Higher profits make sense if there is a high-risk investment. If the state assumes a big chunk of that risk, then a high profit margin makes less sense. Established fields, with known or easily predictable levels of production (with all costs deductible) do not require a high-profit, low-tax regime. If a buck’s to be made, the oil will be produced. If it takes more investment to maximize production, those costs are largely deductible. The oil will still be produced though there is an argument that new costs deserve an extra profit reflecting the time value of the extra money required to be invested.

Yes, the calculation of a fair profit is more complicated than that, and the calculation is variable depending on specific ground conditions. But the state’s problem is that it has not recently made an attempt to make the calculation. In a time when all Alaskans must suck it up and face a reinstatement of an income tax, (deductible, as are oil taxes, from the federal tax of course), it is also a time to do a thorough review of the appropriate tax structure for oil and gas.

John Havelock, as the state’s attorney general, negotiated a new tax regime with the major oil companies in a 1973 special session. 

Go to original piece.

Alaska’s economy tepid, but not in recession yet, economists say

Jeannette Lee Falsey, June 24, 2015, Alaska Dispatch News

Is Alaska’s economy in a recession?

With oil prices low for more than a year and resulting state budget cuts [2], it’s a question on the minds of many Alaskans.

One economic consultant, Gregg Erickson, declared in a recent report commissioned by the Alaska Mental Health Trust Authority titled “The Great Alaska Recession” that the state is in the midst of a “major” recession.

But in a phone interview with the Alaska Dispatch News, Erickson appeared to change his mind.

“The numbers don’t say we’re in a great recession,” Erickson said. “Maybe we should have couched these conclusions in less dramatic language.”

Other Alaska economists agree there’s no recession. Not yet, anyway.

That Erickson could simply declare the existence of a recession, with little data to back up his claim, underscores the fact that the definition of a recession is somewhat subjective. There is no set standard — as there is for measuring earthquakes — for decisively assessing shakiness in an economy.

Read the article here.

State leaders convene dialogue on Alaska’s future in Fairbanks

Nathaniel Herz, Dermot Cole: Alaska Dispatch News

FAIRBANKS — For 35 years, former state Sen. Rick Halford said, Alaskans haven’t worried much about how to pay for state government.

But that has to change, he told more than 200 Alaskans who gathered at the University of Alaska Fairbanks Friday night at the opening of a three-day event to discuss how Alaska can deal with a new era of reduced revenue brought on by long-term oil production declines and a more drastic drop in oil prices since last fall.

“We’ve spent the last 35 years often ordering at wonderful restaurants with no prices on the menu,” said Halford, who co-chaired the transition team for Gov. Bill Walker and Lt. Gov. Byron Mallott with Ana Hoffman. “Today, we’re not just asking people what do they want, but we have to ask, ‘What are you willing to pay for?’”

“That’s obviously where we’re going,” he said.

Halford and others who spoke at the opening dinner advised the members of the Walker-Mallott transition team and dozens of other participants from across the state to use the weekend to begin the process of adapting to the new reality of reduced revenue. Mallott set the stage by saying Alaska may go one of two directions in the future.

“We will either be a state in which we believe that we can be a society divided and still somehow make progress,” he said, or we can be a society in which people know they can disagree but “come together to make the decisions that build a better Alaska for every single one of us.”

Walker, meanwhile, said that many people regard the challenge facing Alaska as a statistical one that can be reduced to charts and graphs.

“Some people see numbers and dollar signs, I see faces. I see faces of children, of grandchildren,” Walker said.

He said he and Mallott have been scrambling since the election last fall with the drop in oil prices, and that the discussion needs to expand and consider the many options facing the state.

Earlier Friday, Walker took part in an event in North Pole at which he heated up and fused together two pieces of plastic pipe as a ceremonial start for the Fairbanks natural gas utility.  He brought the black, high-density pipe to UAF and held it up for the crowd.

“We want to bring Alaska together,” he said. “The deal is, we do need to come together. We do need to talk to each other. We need to stop talking past each other, we need to talk amongst ourselves about what the solutions are.”

Click here for the full Alaska Dispatch article.

The Path to a Fiscal Future: Use Earnings from All Our Assets

Scott Goldsmith, ISER, April 23, 2015

The state government’s assets could generate enough earnings in fiscal year 2016 to pay the Permanent Fund dividend, boost the size of the Permanent Fund, and cut the expected General Fund deficit from $3.3 billion to just over $1 billion—which would still be a big fiscal challenge but much more manageable. That’s the finding of a new analysis by Scott Goldsmith, professor emeritus of economics at ISER.

Those state assets consist of money in the Permanent Fund and other accounts as well as the value of state-owned petroleum still in the ground. Dr. Goldsmith estimates that after first paying the dividend and adding to the Permanent Fund, the state could put $2.2 billion in remaining earnings in the General Fund, which pays for public services. 

Right now the state uses only current petroleum revenues and smaller sources to cover General Fund spending—but those revenues are expected to fall $3.3 billion short of the estimated $5.5 billion in spending next year. Dr. Goldsmith finds that if the state’s broader assets were carefully managed and annual General Fund spending was gradually reduced to about $4.5 billion, part of the asset earnings could be used every year, without risking the value of the assets themselves.

A grant from Northrim Bank funded this research. ISER publications are solely the work of individual authors and should be attributed to them, not to ISER, the University of Alaska Anchorage, or the research sponsors.

Read the analysis, The Path to a Fiscal Future: Use Earnings from All our Assets (PDF, 661.6KB). If you have questions, get in touch with Scott Goldsmith at osgoldsmith@alaska.edu or call 907-786-7720.

ISER head: Time for ‘realistic’ budget discussion including taxes, Permanent Fund

Alaska Dispatch News: Alex DeMarban: March 26, 2015

Saying he’s personally troubled by the lack of a broad discussion about Alaska’s fiscal crisis, the head of a prominent think tank wants to see a statewide conference involving Alaskans and leaders discussing budget reductions and new ways of generating revenues, including through taxes or the Permanent Fund’s earnings.

So far, the solution to the state’s massive deficit has centered primarily on emergency cuts by the administration and the Legislature. Some say that’s a necessary first step before the state begins looking for new taxes.

But with the deficit still expected to be about $3.5 billion, more cuts will surely have to be made. And if the status quo continues – with low oil prices and limited oil production – the state could plow through its savings in three years. That means it’s critical to start having the tough sit-down with Alaskans about the depth of the cuts that are needed and hard choices that must be made to protect the state, said Gunnar Knapp, director of the Institute of Social and Economic Research.

“What are we going to do about this enormous seismic fiscal shift?” said Knapp.

He said he’s personally discouraged because there’s “no realistic discussion” about how to raise revenues, and “furthermore we’re told it’s off the table,” he said.

“It’s such an uninformed discussion it drives me nuts,” he said.

Others agree that a fiscal conversation with Alaskans needs to happen as soon as possible. That includes Gov. Bill Walker, said his press secretary, Grace Jang.

“It’s definitely something that’s a huge priority of the governor’s,” she said. “As soon as this legislative session is over, the administration will take up those discussions, if not sooner.”

Sen. Anna MacKinnon, co-chair of the Senate Finance Committee, said she’s thinking about options for getting the message out. One possibility involves taking her committee on the road so entire communities can weigh in. Whatever path is pursued, making sure it’s inexpensive will be crucial.

“There are variety of options out there, but the more Alaskans are involved in a conversation about our future, the better,” she said.

Knapp said the state’s looming fiscal cliff doesn’t seem to be getting much traction with everyday Alaskans, perhaps because they feel the problem is temporary and, just as in the past, an increase in oil prices will bail the state out of trouble.

Read the rest of the article here.

Alaska’s Dependence on Oil Begins

Alaska’s financial dilemma: The state dependence on oil begins

Dermot Cole March 15, 2015 Alaska Dispatch News

Veteran Alaska Dispatch News reporter Dermot Cole has written extensively about state spending and the Permanent Fund from his base in Fairbanks. Now, in this three-part series, he examines how we got to this point and what we can do to move forward.

First of three parts

A chartered United Airlines DC-8 lifted off from Anchorage International Airport on the most bizarre run to the bank Alaskans have ever seen.

The jet took off at 7:05 p.m. Sept. 10, 1969, for a nonstop flight to New York.

The cargo? Checks valued at about $180 million, more than $1 billion in today’s dollars, written by the world’s major oil companies that day for the right to look for oil on the North Slope.

In that distant time before Internet banking — a decade after statehood and seven weeks after Neil Armstrong walked on the moon — the bankers delivered the checks to New York the next morning, allowing the state to start collecting $41,000 a day in interest.

Since that first windfall, supplemented within days by the rest of the $900 million from the big 1969 North Slope lease sale, the state’s fortunes have risen and fallen with the cycles of the world oil market.

The pattern of spikes and crashes has played out many times through the decades, with a predictable response each time from Alaska — euphoria when oil prices rose and cries for cutbacks and fervent promises to become frugal when oil prices collapsed.

Alaska, still more dependent on oil than any other state, has been stunned in recent months by a revenue collapse, at a loss about what we should do next.

 

Read more here.

Panelists suggests cuts, tapping permanent fund earnings to solve Alaska’s fiscal crisis

Alex DeMarbanOctober 5, 2014, Alaska Dispatch News

With Alaska’s annual budget deficit at more than $1 billion and growing, and the state’s income dwindling, fiscal sages and scholars gathered at an all-day forum Saturday to explore ideas for balancing the budget and staving off a brutal economic crash.

Solutions included ideas that would reduce the annual Permanent Fund dividend to help pay for state services, two days after this year’s $1,884 checks appeared in Alaskans’ bank accounts.

Alaska still has plenty of money, thanks to years of healthy oil production, but it’s disappearing quickly as oil production continues its recent decline. For the fiscal fix that will one day be needed, the state’s $50 billion Alaska Permanent Fund — used mainly to cut those annual checks — presents an obvious income source. Alaska can also count more than $10 billion in savings accounts beyond the Permanent Fund.

But a big question is how to draw from the constitutionally protected Permanent Fund when families rely on the popular dividend checks to pay the bills.

“We don’t have a financial problem, we have a political problem,” said Larry Persily, a former deputy commissioner of the state Department of Revenue and one of the panelists at “Alaska’s Fiscal Future,” a forum organized by Alaska Common Ground and the Institute of Social and Economic Research.

Read more here.

Forum held in Anchorage to discuss Alaska’s Fiscal Future

By KTVA CBS 11 News 11:56 AM October 5, 2014
ANCHORAGE – Experts from across the state are trying to determine if the decline in oil production puts Alaska’s fiscal future in jeopardy.The Alaska Common Ground hosted a forum Saturday at the Loussac Library to discuss a range of fiscal topics, including the long-term oil decline, education funding, capital projects and the role of the Permanent Fund.

Organizers say they hope Saturday’s forum will get Alaskans thinking about their state’s future and whether a sales or income tax is inevitable down the line.

“We’re looking, though, to the future here,” said John Havelock, former Alaska attorney general. “And there is a certain pessimism because oil revenues are going down. But as I was pointing out, the revenues are not going to disappear, not in any foreseeable future, and the rate of decline gets slower and slower every year.”

Read more here and see the video.

‘Pry (the dividend) out of my cold, dead hand: Debating the future of the PFD

Posted by KTUU, October 4th

Days after hundreds of thousands of Alaskans enjoyed a cash windfall to the tune of $1,884, the future of the Permanent Fund dividend is being debated.

On Saturday afternoon, a panel of experts gathered at the Wilda Marston Theater in Anchorage to discuss the future of the more than $51 billion rainy day fund and its role in government spending.

“If you want to get my Permanent Fund dividend then you’re going to have to pry it out of my cold dead hand,” said John Havelock, University of Alaska Anchorage professor.

UAA Professor Scott Goldsmith says the constitutionally protected Permanent Fund is secure and growing annually, but the dividend, which is based on the earnings from the fund, could be used to one day pay for government services.

Goldsmith says the situation is caused by declining petroleum revenue and production, which means the state will look to other sources of cash to pay for education, troopers and other services.

Despite the decline in production, some experts say Alaska remains in good financial shape.

“Oil production has been declining for the past 25 years,” said Goldsmith.  “The Permanent Fund has grown and the size of the dividend has grown and that’s because the Permanent Fund dividend depends on the size and earnings of the Permanent Fund, not only current petroleum revenues.”

Havelock says Alaska still has about $9 billion in fiscal reserve funds, but says if a solution isn’t found within the next five years the state’s future could be in question. Hopefully, he says, there will be no need to tap the Fund earnings which would reduce dividend checks.

“The Permanent Fund represents the fact that the resource belongs to the people,” said Havelock.  “If they need to get revenue then they should tax it to get that revenue back, but they should just be taking away the dividend which is like taking away a person’s personal property.”

Read more here.

Everything you wanted to know about legalizing marijuana (but weren’t sure you could ask)

Suzanna Caldwell, Alaska Dispatch News September 13, 2014

In November, Alaskans will decide whether the state will become the third in the nation to legalize the recreational use of marijuana. It’s controversial in that the drug is still illegal at the federal level, but also because it will essentially create a new industry — or at least a newly legitimate industry — in the state.

Consideration of legalization puts Alaska at the forefront of the movement to allow recreational marijuana sales, following Washington and Colorado. Oregon voters also will consider a similar measure and are set to vote on the same day Alaskans will.

Alaska is known for its live-and-let-live mentality and libertarian attitudes. So far, Alaska is the only state to endorse the private use of marijuana in the home, adding shades of gray to a legal area that is already far from black and white. Put those together, and it makes sense that Alaska would be one of the first states to look at whether or not the drug should be legalized.

However, the road to legalization is a complicated one. Those in favor of the initiative are quick to say that marijuana prohibition has failed and that it’s time for the state to take back the black market and stop unnecessarily criminalizing people. Those against it say Alaska’s drug policy is working and that legalization will only proliferate the drug, cause increased use — especially among youth — and be a burden on public health.

Questions go beyond whether you’re a heavy toker or staunch abstainer. Besides figuring out how to deal with public safety and health are the larger questions about how to create an entire industry from scratch. Much can be learned from what’s happening in Washington and Colorado, but there are unique issues only Alaska will face.

Below is a primer on what we know and don’t know about the proposed law, drawing on legal history, precedents being set in other states and our own reporting, including a handy timeline that outlines major events in Alaska marijuana history. Expect this to be updated as we continue our reporting on what this measure could mean for Alaskans.

Read the rest here