Fiscal Certainty and a Stable Tax Enviornment

When most people think of a stable and durable tax environment, they think the producers are asking for a lock on gas taxes for a substantial number of years. Some have suggested 35 years as a reasonable timeframe. But there are alternatives that haven’t been considered that can provide the producers with just as much stability without a contractual lock on the gas tax they are requesting.

In order to understand the effectiveness of an alternative to the producers’ proposed contractual lock, the producers’ issues of concern needs to be identified and understood. Why do the producers believe the Alaska tax structure is not stable or durable?

The producers are concerned that, even if the tax is fair, the legislature may ultimately decide to increase the tax to balance the State budget during hard economic times, especially after the producers have committed billions of dollars to an Alaska Gas Pipeline. This is part of the reason why the producers say that there is no fiscal stability in the State tax structure, and they are correct. The producers have seen this “pressure to increase taxes” occur every time there is pressure on the State to find additional tax revenue to balance its budget. If this concern were addressed effectively, then the concern about legislative freedom to change the tax would not be as important.

There are two aspects of producer concern: first the legislature’s willingness to change the law whenever it serves the interests of a majority of the legislature to do so, and second the legislature’s need to find additional tax revenue to balance the state budget when times are tough.

Regarding the first issue, the legislature is generally reticent to take on controversial issues unless it is absolutely necessary. Gas taxes is one of those issues. Unless the oil and gas industry is receiving a strongly disproportionate share of the revenue, e.g., oil taxes under the economic limit factor (ELF), the legislature will not take up the tax issue during the legislative session. If the legislature does an effective job when it revises the current gas tax and creates a fair tax, then it will not be necessary to take up the issue for purposes of a fair allocation of revenue between the State and the producers. The first part of the tax stability issue will have been resolved. So long as there is a fair allocation of revenue between the State and the producers the political incentive to change the tax is gone.

The next problem the producers have with our current system is that the State’s budget is based on projected annual revenue in the general fund. Oil taxes are placed directly into the general fund for legislative appropriation. If the state is having difficulty balancing its budget, the industry believes that increased oil and gas taxes will be the first place the legislature looks to balance the budget. Personal income taxes and any other taxes that burden the Alaska public come only after taxing the oil and gas industry. Historically fiscal restraint and increased taxes on the oil and gas industry have allowed the state to balance its budget without burdening the rest of Alaska with additional taxes. Serving as the backstop for the legislature to balance its budget is not a business friendly environment in which to operate for the oil and gas industry.

So long as the state’s budget is based on oil and gas revenue in the general fund the state will not have a predictable and durable tax structure. So long as the State can increase oil and gas taxes to balance its budget, the state will not be a stable fiscal environment in which to do business. What the State needs to do is to alter the way funds are received and spent. A method needs to be devised whereby an increase in oil and gas taxes does not “fix” the state’s current budget problem. If new taxes could not be used to balance the state’s budget; then there would be less incentive to raise taxes on the oil and gas industry.

If the legislature were to be able to change its tax structure to create a fair tax and change the budget process to address the stability concern prior to the Alaska Gas Pipeline open season, then the legislature will have effectively addressed the producers’ desires for a stable and durable fiscal regime.