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Oil Tax Credits: What are they, and why are they a problem?

Last Modified: 2nd February 2017

Executive Summary

Historically, one of the primary ways the state gets revenue from oil production has been the Oil Production Tax (the other is royalties). The current version of the production tax involves large cash payments to oil companies. These payments make the tax rate negative when prices are low, and cripple the state's ability to balance the budget. They are promoted as an investment in future oil revenue, but doing the math, it is very unlikely for the state to recoup that investment, even if the credits do lead to more oil production. The government does not make more money by subsidizing development that would be uneconomic for the private sector to do alone. Cash payments, credits against tax liability, and taxing net profits rather than gross value have combined to make our production tax lower than at any time in state history.

Abolishing the credits would reduce risk to the state and eliminate the possibility of spending more on credits than we take in in taxes. Oil development would be determined by market forces, which the state could then tax at a reasonable rate. Replacing the current tax scheme with a flat tax on wellhead value would bring in significantly more revenue than the current system, and be simpler to administer. Making a wellhead tax progressive with price (instead of flat) would further increase revenue to the state.

Oil Industry Credits: Alaska gives large cash credits to oil companies

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We Make Large Cash Payments to Oil Companies

Summary: These tax credits are a huge and ever-growing liability to the state, crippling our ability to balance the budget.

These Credits are NOT an Investment in the Future

Summary: The state is making large cash payments to oil companies. History and evidence suggest that these payments will NOT yield large future revenues for the state (even if they lead to new production and yield large revenues for the companies involved). The most likely outcome is large current expenditures (which the state has no budget for) in exchange for marginal future production which does not offset present costs.

 

Tax rate: Oil Production Tax is at historically low levels -- sometimes giving out more money than it brings in

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Our Production Tax is no longer a Tax – It's a system for redistributing money between Oil Companies and the state.

The State Pays 35% of Oil Company Expenses, through the Carried-Forward Annual Loss Credit

Summary: The carried-forward annual loss credit makes the state an automatic 1/3 investor in all oil company projects, and shifts risk from the oil companies onto the state. It can reduce production taxes to zero, even for large oil companies, and cripples the state's ability to use oil taxes from good years to offset bad years.

What is Alaska's Share?

Summary: The state still makes money from oil due to royalty payments, but our current production tax scheme makes large cash payments to oil companies that we cannot afford, shifts risks from the oil companies to the state, and is ineffective at raising money under any reasonable set of assumptions. Even when we take into account the potential for royalty payments, this "investment" in the oil industry costs the state more money than it is likely to recoup.

Tax revenue: The Oil Production Tax has been costing us money, and is predicted to be negative or near-zero into the foreseeable future

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A Gross Wellhead Tax Would be Simpler and Serve us Better 

 
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By Erin McKittrickBretwood HigmanGround Truth Trekking

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Date Created: 1st February 2017