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We have all heard the KISS principle (Keep It Simple
Stupid). Normally it is better to not add complexity where complexity
doesn’t add substantial benefit. It just provides more ways for something to
break. The governor has embraced this “simple” strategy in laying
out his four guiding principles. The governor's third principle is that oil taxes must be
simple so that they restore balance to the system. The question that needs to be asked is how does simplicity affect the economics of oil and gas in Alaska.
First off, I’m not sure how simplicity equates to balancing
the system. If the governor means that we should get rid of progressivity to obtain the balance he perceives as correct, that would make sense. But
simplicity, in and of itself, doesn’t increase competitiveness or put oil in the pipe. I have never
heard of an oil company, especially a major oil company, say “We are not going
to invest in that country. Their tax system is just too complex.” Actually what
happens is that the oil company sets their tax lawyers to work trying to
understand how they can use the complexity of the tax to their advantage. You
need only look to how the oil companies managed the ELF (economic limit factor)
over the years to understand their ability to manage a tax. A simple tax will
not increase exploration and development in Alaska because simplicity does not
change economics or geology.
Arguing that deleting progressivity from the tax will
somehow make it simple is to not understand the tax. The progressivity formula
is quite simple to implement. Some may not like the results, but the formula is
simple. The real problem with the complexity of the tax comes in identifying
capital and operating costs, and credits and deductions. This is where the
complexity comes into play. This is why the department of revenue is so many
years behind in auditing the oil companies. If the governor wanted to make the
tax simple and reduce complexity, this is where he should have focused, and
even that would not have added oil to the pipeline because it does not change
economics or geology.
Stating that the tax should be simple may make for a good
sound-byte, but it doesn’t impact the production of oil into the pipeline.
Simplicity will not increase or decrease production. It’s just not material.
Next, what about economics and geology? Can we change the
future by modifying the tax?
