Ethics Reform, Oil Tax Reform Gaining Momentum

Dear Neighbors:

        As you know, I, Senator Hollis French (Democrat-Anchorage) and others have been pushing for two major reforms in Juneau. Though Governor Murkowski and some in the Legislature have put ethics and oil tax reform on the back burner, both efforts are gaining momentum this session, and I'll keep pushing them this year. Alaskans deserve a fair share for our oil, and also deserve to have public officials who adhere to the highest ethical standards. I'm attaching 2 recent articles on ethics and oil tax reform that ran in publications outside of Anchorage, and that you may not have seen. Let us know if you want more information on either topic.

        Our bill to close loopholes in the state's ethics laws passed out of the House State Affairs Committee 2 weeks ago. Our Alaska Fair Share bill, which closes outdated oil tax loopholes that have cost the state more than $3 billion in lost revenue over this, and the last 2 fiscal years, passed out of the House Ways & Means Committee last week. This week we filed an alternate version of our oil tax reform bill.

        In addition, Governor Murkowski recently conceded what we've been saying since 2004 – that Alaska's oil tax system is shortchanging this state. Those who've resisted reforming our oil tax laws are $3 billion in tax giveaways late, but late is better than never, and now the Governor has stated he, too, will propose oil tax reform legislation. Stay tuned.

        As always, let us know if you have any questions on these or other issues. We hope all is well.

        Constituent Meeting Coming Up! Finally, we're holding a constituent meeting and pizza party in Anchorage on February 26th from 4-6 p.m. at the Fairview Recreation Center, and hope you can attend.

        Hope to See you Soon,

How serious are lawmakers about ethics reform?

(This editorial ran in the Mat Su Valley Frontiersman on February 3, 2006)

        Amid the daily hustle and bustle in the halls of the Capitol, a showdown of great interest to the people of Alaska is quietly in the making. How it plays out, with an election on the horizon later this year, should signal to voters just how serious those who represent them are about ethics reform.

        In the wake of the scandal-tainted resignation of former Attorney General Gregg Renkes in 2004, there was near unanimous wringing of hands and political posturing about the need to clarify this state's executive ethics laws to define more clearly what a financial conflict of interest entails. Both the governor and the Legislature committed to fixing the problem, yet everyone left Juneau last spring without new ethics legislation being approved.

        The best the majority could do was a widely reviled and, indeed, unconstitutional proposal that sought to fight the problem of executive ethics reform by making it unpalatable for a citizen to register an ethics complaint. Senate Bill 186, offered up by Ralph Seekins, a Fairbanks lawmaker with gubernatorial aspirations, would have imposed criminal penalties on anyone who took their ethics complaint public.

        Had the bill been law two years ago, when former Wasilla mayor Sarah Palin took on Renkes, she could have been jailed for talking about the case to other concerned citizens. The outrageousness of the proposal was evident in the way it was so roundly criticized.

        Nonetheless, it passed out of the Senate last spring, with the blessing of Mat-Su senators Lyda Green and Charlie Huggins, before it was declared dead in the House, whose members appear to be a bit more in tune with their constituents.

        Among those driving a stake through the heart of the bill was Anchorage Rep. Lesil McGuire. This is significant because McGuire is now front and center in the ethics legislation showdown.

        The Judiciary Committee she chairs is slated to take up a different ethics bill this week. House Bill 194, sponsored by Les Gara of Anchorage, may not be perfect legislation, but it implements all the recommendations of attorneys for both the governor and Legislature about nixing the vague law and clearly defining guidelines for financial conflict of interest.

        What it does not include, rightfully, is a penalty against someone filing a complaint. The House State Affairs Committee, chaired by Homer Rep. Paul Seaton, a steady voice of reason in the majority caucus, recognized the bill's merits in approving it last week and sending it on to Judiciary. It is worth noting that Mat-Su Rep. Carl Gatto, who sits on State Affairs, also gave the proposal his approval.

        How far this worthy bill progresses in a highly partisan Legislature remains to be seen. Gara, after all, is a Democrat. And a warmed-over version of Seekins' bill, which, appallingly, still contains penalties against complaint-filers, is set to be heard in both Seaton's and McGuire's committees in coming weeks.

        Legislative skeptics say this bodes ill for meaningful ethics reform this session. We remain hopeful, though, that House lawmakers, led by Seaton and McGuire, will put partisan politics aside and do the right thing for the people of Alaska by standing up for Gara's bill and promptly dismissing Seekins' misguided and self-serving proposal.

Gara pushes oil tax bill; opponents await Gov’s tax proposal

(The following article ran in the Alaska Budget Report on January 19, 2006)

        At a House Ways and Means hearing last week, in an open letter to the governor, and a “special order” on the House floor yesterday, the indefatigable Rep. Les Gara continues to preach his gospel of oil tax reform.

        “This is a state that is allowing itself to be poor when it should be rich,” the Anchorage Democrat told Ways and Means Committee members on January 13.

        The hearing was on HB 63, Gara’s proposal to reform the state’s oil production tax. The measure has three co-sponsors: Democrats Beth Kerttula, Eric Croft and David Guttenberg. Introduced January 12, 2004, the measure had one hearing last year and remains in the first of four committees of referral [see Gara and French present case for ELF changes and AOGA says no to ELF changes, Alaska Budget Report, March 24, 2005].

        Sometimes described as the oil severance tax, the production tax includes a much-amended 1977 provision called the economic limit factor (ELF). Because of the ELF tax break, no Alaska oil field now pays the top nominal tax rate, 15 percent of the value at the wellhead, and many fields escape the tax entirely. Proponents of the provision say it was meant to improve the economics of smaller, marginal fields in production.

        Gara and others say the tax break now applies to many fields that do not need it, costing the state millions of dollars in lost revenue. “Blockbuster fields” including Kuparuk, the nation’s second-largest oil-producing field, are now exempt or virtually exempt from the state’s production tax, which has fallen from an average of 13.5 percent in 1993 to 7.5 percent in 2004. Absent changes to the law, the average rate will fall to 1.5 percent by 2015, Gara said.

        “If we do nothing, every year that we sit here the production tax we get falls,” Gara said, because larger fields are being replaced by smaller fields.

        HB 63 establishes a 5 percent minimum production tax on all fields, and ties the tax rate to oil price. As the price rises above $20 per barrel, so does the production tax, up to a maximum rate of 25 percent. When oil prices fall below $16 per barrel, the tax falls.

        According to Department of Revenue projections, at $47 per barrel, HB 63 would generate an additional $1.24 billion for the state; at $25.50, it would raise $204 million. At $10 per barrel, the bill would reduce production tax revenue by $50 million.

        Gara quoted Governor Frank Murkowski’s January 10 State of the State address: “With record high oil prices and our present antiquated oil tax system, Alaska has not been getting a reasonable share of oil revenue compared to what the producers are paying elsewhere in the world.”

        According to Gara, when Alaska oil sells for $59 per barrel on the West Coast, company rates of return on their Alaska investments average 43.5 percent; even when prices are as low as $15 per barrel, the producers still make a 6.7 percent return.

        “We could do something with that money, Mr. Chair,” Gara said. Noting lawmakers’ constitutional duty to develop Alaska’s resources for the maximum benefit of its people, he asked, “Are we providing the maximum benefit from our oil?”

        Oil industry’s Alaska profits for the third quarter of 2005 (ExxonMobil, BP and ConocoPhillips combined) totaled $20.2 billion, Gara said, or $9.3 million per hour. In three months, the three companies made enough money to pay for a gas pipeline, Gara noted.

        Gara said his bill contains provisions designed to protect industry. If oil prices fall below $10 per barrel, half the production tax would be waived, and the other half deferred until prices rise above $16. The bill exempts heavy oil, and allows taxpayers “production tax relief” modeled after the state’s Royalty Relief Act of 2003 (HB 28): if tax relief is needed for a field to be “economically feasible,” Revenue has the power to waive the additional production tax and royalties for that field.

        Responding to a question from Rep. Max Gruenberg, Gara said an international study by the Scottish firm Wood Mackenzie found that oil development in Alaska is more profitable than in many other places. He said he has not read the report in its entirety because he is wary of signing the confidentiality agreement required of Alaska lawmakers. He does not want to be subject to the liability and have to prove that he got from other sources the information he shares publicly, he said.

        [For more on the Wood Mackenzie report see LB&A probes AOGA claims on oil competitiveness, January 27, 2005; ANALYSIS: Consultant data cast doubt on AOGA claims, February 10, 2005 and prior stories cited there.]

        Also testifying was former state assistant attorney general and deputy revenue commissioner Deborah Vogt. Vogt, who said she worked on oil tax matters for about 20 years during her state service, called the legislation “long overdue.”

        Vogt said the production tax structure approved in 1989 is no longer appropriate: “That legislation was designed for the oil production structure of that era—basically, we had two giant fields and everything else was negligible. But now that formula, which was great at the time, is allowing vast sums [of money] to escape the state.”

        At $47 per barrel, the predicted long-term average oil price through 2025, Vogt said, industry’s take is about 48 percent of net revenue and the state’s share is 28 percent; the remainder is the federal share. Gara’s bill would reduce industry’s share to 40 percent and increase the state’s share to 38 percent. That split does not change dramatically as oil prices swing, Vogt said, a feature that indicates Gara’s bill is carefully crafted.

        Vogt took issue with the notion that the bill would “drive industry out of Alaska.” Even at $20-per-barrel oil, industry net profit would be 21.4 percent, she said. “I’d love it if my Vanguard fund did that for even one year.”

        Quoting a 1981 letter from her late husband Hugh Malone, a former Kenai representative, she read:

        “The real argument is over money, and the control of Alaska. … How to use money from Alaska to benefit Alaskans is not the question that will be asked by those who would take that money from us. They will not be concerned with building a diversified and stable economy in Alaska.”

        Ways and Means Chair Bruce Weyhrauch closed public testimony and concluded the meeting with no announcement about his plans for the bill.

        The Alaska Oil and Gas Association, comprised of 17 member companies, did not testify, but sent Weyhrauch a letter dated January 9 outlining the association’s “grave concerns” with HB 63 and with HB 223, a gas reserves tax by Rep. Eric Croft.

        The letter, signed by Executive Director Judith Brady, says HB 63 would be “particularly egregious” to the industry because it creates a structural tax increase of 27.5 percent, and raises the maximum severance tax by 67 percent, from 15 percent to 25 percent. Brady writes:

        “The Department of Revenue has briefed the legislature that, in order to maintain current production levels of just under 1 million barrels per day over the next decade, the state will need to see a doubling of investment dollars to Alaska to increase development of heavy/viscous oil, satellite fields, infield and wildcat production. HB 63 will act as a strong disincentive to new investment in all four areas.”

        AOGA urged lawmakers to consider three policy questions as they discuss changes to the current fiscal system:

“1) Will a particular fiscal policy make Alaska more or less competitive for oil and gas investments?

“2) Will a particular fiscal policy encourage or discourage investment in each of the four types of new production in Alaska?

“3) Will a particular fiscal policy encourage investment in a gas pipeline?”

        Following the hearing Weyhrauch told reporters he’d like to give opponents of HB 63 an opportunity to respond, and would reopen public testimony if he gets a request from industry. In response to a question, Weyhrauch said that if someone other than an industry representative wants to testify, he would allow it.

        Asked whether he will allow the committee to vote on the bill if the votes are there to move it, he said, “I don’t know yet; we’ll see.”

        Tadd Owens, executive director of the Resource Development Council, told a reporter his organization would probably wait to learn about the governor’s net-profits tax proposal before asking to testify on HB 63. He said RDC has not taken a formal position on the bill because there hasn’t been a need to, but noted, “Our members are always concerned when there’s talk of changes to taxes in the business community.”

        He said RDC members want long-term tax stability, adding: “The current system is not broken. … Alaskans are now trying to decide what to do with an embarrassment of riches.”

[This article was originally published in the January 19, 2006 issue of the Alaska Budget Report, a weekly publication covering state policy and finance. Reprinted by permission. For information see www.akbudgetreport.com]