Dept. of Revenue Report: Oil Tax Credits Are A Poor Investment for Alaska

Are North Slope oil tax credits a good investment for the State of Alaska? That’s the question asked by a recent report from the Department of Revenue. The researchers answer: No, not compared to other options. But some experts say the paper doesn’t give the tax credits a fair shake.

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A chart from DOR shows how much revenue is generated by oil tax credits if various percentages of new barrels of oil are attributed to tax credits. The number is compared to investing the credits into the Constitutional Budget Reserve instead.
A chart from DOR shows how much revenue is generated if various percentages of new barrels of oil are attributed to oil tax credits. The number is compared to investing the credits into the Constitutional Budget Reserve instead.

From 2009 to 2014, the state paid out $4 billion in tax credits to oil companies. The undated paper from researchers at the Department of Revenue asks a simple question – what if we hadn’t? What if we had invested that money in the Constitutional Budget Reserve instead? Their answer: even if all new oil production from 2011 to 2024 is attributed to those credits, the state would still make more money if they put that $4 billion into the CBR instead. The paper says the state subsidized every barrel of oil produced from 2009 to 2014 by at least $11. The researchers conclude the reward for investing in oil tax credits isn’t worth the risk.

The authors of the paper, Loren Crawford, Tim Harper, and John Tichotsky, are with DOR’s Economic Research Group and were not allowed to speak about their work.

But two other experts were willing to offer their thoughts.

Retired UAA Professor of Economics Scott Goldsmith says the paper has flaws; he likens it to an examination from 30,000 feet. But he says the idea behind it, weighing the opportunity costs of spending, is very useful.

“This is the kind of analysis we need much more of, especially as we move into tighter fiscal times,” he says. “We need to look at the return of the money our government is spending.”

It would be better to divide the credits out by type to see which is the most effective, he says. And the credits should be analyzed for their impact on the overall economy, like job creation. “Because the health of the overall economy is an important public policy objective of the state as well as balancing its budget.”

Former deputy director of the Department of Revenue Larry Persily says ultimately, all tax credits are like rolling the dice – you never know if they’ll have great returns or not. He says the paper doesn’t go deep enough to definitively conclude that oil tax credits are a bad investment.

“This report raises some good questions, poses some hypotheticals. I just don’t think it’s complete and comprehensive enough to answer the question,” he says. “So people shouldn’t look at this report and think ‘Oh that gives me the black and white answer. It just gives me another shade of grey.’”

Persily says one major problem is the length of time of the comparison. The paper says that in the best case scenario, the state would only bring in $2.6 billion in new revenue because of the credits. But that’s only over 10 years.

“It doesn’t look at the lifetime of new fields, if there are new fields. If the new fields develop and produce oil for 20 or 30 years. Certainly that is conjecture, but to be fair, you have to look at a longer period of time than this report looks at.”

The state’s oil production forecasts, which were used for the report, only go 10 years into the future and even then they are a best estimate.

Persily says another flaw is using the Constitutional Budget Reserve as a comparison tool because that fund is scheduled to run out of money in the next couple of years. Adding in the $4 billion spent on oil tax credits would only extend the CBR’s life for a year or less.

Department of Revenue Tax Director Ken Alper says the analysis is just one of many different tools his division is developing to evaluate the effectiveness of tax credits and possible alternatives to them.

What are the benefits for the state of “lending money directly ourselves, or even taking ownership stake in an oil or gas field?” Alper asks. “These are sort of options that are on the table and things that we are looking at. And that particular paper is just one of several pieces of research that we’re using to try to inform policy discussion and possibly a new direction for this administration.”

The paper is marked final and was released through an information request submitted by KSKA. But Alper says he views it as a draft and plans to release a different version at a later date.

He says he disagrees with some of the final numbers in this paper because it includes qualified capital expenditure credits, which he says aren’t really credits. Excluding those would change the results by hundreds of millions of dollars, but separating the QCEs from the others is a difficult, lengthy process.

Though Alper disagrees with parts of the paper, he says the oil tax credit system does need to change.

“There’s a general recognition that the system as it is now is probably unsustainable simply because we can’t afford it.”

Last week, Governor Bill Walker delayed the payment of $200 million in oil tax credits, in part to spur discussion of the issue.

You can read the full paper here.