KISS Principle

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?