Fourth of July is a good time to talk about taxes

By Larry Persily

I’m sorry to say this column is about taxes. Oil and gas taxes. Corporate taxes. Legislative debate over taxes. If you want to read about the World Cup or salmon fishing or summer recipes for the best potato salad, this is not your cup of iced tea.

But what better to talk about on the week of the nation’s birth than taxes, one of the major gripes of the colonies against England.

In the week before the nation’s 250th birthday, the Alaska Legislature is embroiled in its own debate over taxes. It has nothing to do with tea and everything to do with oil, which is the usual topic of tax debates in Alaska.

Some legislators want to expand the reach of the state’s corporate income tax code to cover privately held businesses, known as S Corps., LLCs (limited liability companies) and LPs (limited partnerships).

The majority of businesses in Alaska are small LLCs, which aren’t looking to avoid corporate income taxes as much as the owners want to shield their personal assets should something go wrong with the business. It doesn’t much matter to the federal government, since whatever profits those companies earn are taxed at the individual owners.

In Alaska, however, which lacks an individual income tax, those corporate profits are tax free.

The attention-getter in this debate is that the second-largest oil producer in Alaska, Hilcorp, fits into the LLC/LP business model.  And now comes another LLC poster child, Glenfarne, the privately held company that thinks it is going to develop a multibillion-dollar Alaska North Slope natural gas pipeline.

Legislators who have argued for years that state law should be amended to tax privately owned Hilcorp see the same problem with Glenfarne, and they want to add the corporate tax expansion to the pipeline project property tax relief bill now before the Legislature.

It helps to understand how the state makes its money: Oil and gas producers will make payments to the state totaling an estimated $1.86 billion, or 27%, of state general-purpose revenues for the fiscal year that starts July 1.

The biggest revenue stream is the royalty check — the state’s share of whatever oil and gas companies pull out of the ground on state leases, generally 12.5%.

No. 2 on the list is the production tax on any oil or gas produced in Alaska, no matter who owns the land or the subsurface rights to the oil and gas.

The state assesses a property tax on oil and gas exploration, production and transportation assets — think drilling rigs, processing plants and pipelines.

None of those three — royalty, production tax and property tax — has anything to do with a company’s profits. That’s the job of the corporate income tax. Except that it doesn’t apply to privately held companies.

State services help companies make a profit, whether K-12 schools and universities that provide skilled workers, highways to move equipment, public safety and law enforcement to keep the order, and all the other services the companies’ employees use.

It seems reasonable that all companies — whether privately held or publicly owned, whether oil and gas producers or not — should pay a tax on their profits so that the state can provide the services the companies and their employees need and use. Individuals should pay something too, but that is a subject for another legislative debate.

In the case of the Alaska gas line project, the developer would not pay royalty or production taxes — the oil and gas producers would pay those assessments. If the state is going to give the private company a big break on property taxes, it’s all the more important to collect corporate income taxes on its profits. Otherwise, it would be contributing little directly to the public treasury.

It’s only fair, and isn’t that what the colonies wanted.

• Larry Persily is a longtime Alaska journalist, with breaks for federal, state and municipal public policy work in Alaska and Washington, D.C. He lives in Anchorage and is publisher of the Wrangell Sentinel weekly newspaper.