With $3B budget deficit, lawmakers eye oil tax credits

With the state facing a deficit next year of more than $3 billion, lawmakers face the always vexing question of what can be cut. One option on the table is reducing tax credits for oil and gas companies.

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This week, lawmakers gave a preview of the debate coming in January.

The Senate Oil and Gas Tax Credit Working Group has the kind of name that puts anyone but the most hard core policy wonk to sleep. But, as with so many things in state government, behind that patina of boring is a whole lot of important.

This chart, from the Alaska Department of Revenue, shows growth in non-North Slope (almost entirely Cook Inlet) refunded credits since FY10. (Source: Alaska Department of Revenue)
This chart, from the Alaska Department of Revenue, shows growth in non-North Slope (almost entirely Cook Inlet) refunded credits since FY10. (Source: Alaska Department of Revenue)

The issue before the group — always contentious — is how Alaska should tax its oil and gas companies. Right now, the state offers tax credits as incentives, to get companies to come to Alaska, produce oil and gas, and generate jobs and economic activity.

But with the drop in oil prices, those credits are looking out of balance. Last year, the state paid out almost $630-million in credits, while collecting just about $300-million in production taxes.

Governor Bill Walker argues that the state simply can’t afford that, especially when it is making deep cuts elsewhere. Tax Director Ken Alper made that case to the working group.

“It has to come down to, what can we afford and what’s reasonable in this era of tightening our belts?” Alper said. “What can we reasonably give to support this?”

Production taxes aren’t the only source of oil revenue – the state collected another $1.7-billion, mostly in royalties, though also in property and corporate taxes. But historically, production taxes have been the work horse of the state budget.

The working group was convened by Anchorage Republican Cathy Giessel, who chairs the Senate Resources Committee. Giessel called the tax credits “foundational” to Alaska’s oil tax system. “Changing them changes the whole game,” she said.

“You talked about economic opportunity, and these credits create that economic opportunity for the smaller companies to come in and develop our resources,” she told Alper. “And we in turn benefit from that.”

Tuesday’s session focused on credits for companies working on the North Slope, and Pat Galvin an executive at Great Bear — and former state Revenue Commissioner — explained how credits have helped his company.

“A company is going to have a certain amount of capital that’s available to spend,” Galvin told the working group. “The tax credit is a multiplier, that allows you to do more with the money available to you.”

The administration hasn’t yet finalized its proposals for changes to the system. Alper laid out a list of options, including reducing the amount of credits and allowing the state to release more information about how much money is going to which companies.

But he says the bottom line is, the current system is unsustainable.

“Not only is it $700m a year now, it’s a bilion or a billion and a half if some of the larger entities that are looking for oil come up with it,” he said. “Where exactly are we going to come up with a billion dollars a year?”