Senate cuts oil tax ‘loophole’ as Dunleavy administration suggests gasline won’t happen unless developer gets big tax cut
- Mark Sabbatini
- 1 day ago
- 7 min read
Battlelines for second half of session taking shape as lawmakers ponder state’s recent lean years, potential windfall of oil price spike, and what’s a fair share for industry to pay to drill
By Mark Sabbatini
Juneau Independent
A tug-of-war over taxes on oil and gas companies is pulling lawmakers at the Alaska State Capitol in opposite directions this week, with an effort to collect an extra $100 million annually at one end and an attempt to give back hundreds of millions a year at the other end.
The Senate approved the collection effort in a floor vote Wednesday to require privately owned oil and gas companies to pay state corporate income taxes they are currently exempt from. That same day a House committee held its first hearing on a new bill by Gov. Mike Dunleavy giving what officials say could be a 90% tax break to the developers of a proposed natural gas pipeline.
Both oil taxes and the natural gas pipeline have been discussed extensively for years — and both proposals taken up this week face significant practical and political hurdles if either is going to pass the Legislature during the final eight weeks of this year’s scheduled session. But lawmakers are acting with urgency due to what they see as limited windows of opportunity for real progress.
"Do you have anything else on your plate for the next at least two or three weeks?" Rep. Mike Prax, R-North Pole, asked Dan Stickel, chief economist of the Alaska Department of Revenue, during Wednesday’s meeting of the House Resources Committee when the governor’s bill was being discussed.
"Yes," Stickel said with wry amusement and apparent anticipation of what was coming next.
"Cancel those appointments," Prax suggested, adding "this is a complicated decision we have to make and it's disappointing that we haven't been thinking about it for a year, frankly."
The key issues for both tax proposals are age-old questions at the Capitol: What’s a fair share for Alaskans as defined by the state’s laws and constitution, and at what point do those taxes and fees reach a level where companies balk at developing and operating projects?
One point of comment agreement is those are exceedingly difficult questions to answer given the unpredictability of income from current and future drilling projects — due to national political leanings as well as state-level considerations — plus the web of taxes, royalties, fees, exemptions and other financial rules the state has for the industry.
"I've said many times that we have one of the most complex oil and gas fiscal systems in the world that pertains primarily to our oil and gas production tax," Stickel told lawmakers during Wednesday’s committee hearing.
Sudden Senate vote to increase oil and gas taxes
The Senate on Wednesday turned a House bill with a mundane purpose — renewing a three-year oil royalty agreement for a company processing state-owned oil at a Kenai Peninsula refinery — into a political hot potato. Sen. Forrest Dunbar, D-Anchorage, introduced an amendment imposing state corporate taxes on privately owned oil and gas companies of up to 9.4% based on their net profits.
The move is the latest of many attempts to eliminate what policymakers refer to as an "S-Corp loophole," which refers to companies organized as passthrough S corporations having their profits taxed at a personal income level — and Alaska has no personal income tax. The most notable instance of that occurrence is Hilcorp Energy Co., which operates the Prudhoe Bay oil field after purchasing BP’s Alaska operations in 2019.
Dunbar, during floor debate on his amendment, said discussions at the time of Hilcorp’s purchase show "it is clear that they expected to pay this tax."
"They expected that we would fix this technicality and they would pay the same corporate taxes that BP paid for the same work," he said. "I believe they are shocked, perhaps amused, perhaps laughing at us behind closed doors that we have not yet done so."
Opposing the amendment was Sen. Jesse Bjorkman, R-Soldotna, who said changing the so-called loophole may be a worthwhile policy goal, but rushing it through as an attachment on a bill is the wrong approach. He said time is needed to assess what revenue and other impacts the change and tax levels as proposed will have.
"We don’t do things in a half-cocked manner, because that’s how mistakes are made," he said.
The Alaska Oil and Gas Association issued a statement expressing similar concerns, as well as declaring it opposes a “new tax on privately held oil and gas operators."
“It targets a narrow group of producers with a discriminatory tax, reversing long-standing policy and creating uncertainty for investment at a time when Alaska should be encouraging development — especially in areas like Cook Inlet where reliable energy supply is critical," the statement notes.
Arguments made by senators supporting the amendment included noting the state’s lean financial situation due largely to low oil prices that have dropped sharply the past few years, which this year resulted in a budget with the lowest inflation-adjusted Permanent Fund Dividend ever and relatively few infrastructure projects getting funding. Tax breaks for the petroleum industry have been blamed for shortages of state funds for more than a decade.
Also, lawmakers noted, a huge upward spike in oil prices due to the Iran war means companies are poised to see considerably higher revenues and the state should be a beneficiary of those as well. Dunbar, among others, asserted that the tax breaks given to the industry means "we have failed to uphold our constitutional obligation to get the maximum value for our resources."
After the amendment passed by an 11-8 vote, the bill itself passed 12-7. The House must now concur with the changes before it is sent to Dunleavy for his signature or veto. Jeff Turner, a spokesperson for the governor, issued a noncommittal statement in an email to the Anchorage Daily News that Dunleavy “supports a comprehensive and durable fiscal plan that places guardrails on spending and will diversify and grow the state’s economy."
‘The Alaska LNG project will not proceed without property tax relief’
Dunleavy is making a big push for his gasline tax cut, and encountering some big pushback from concerned state and municipal officials about the possible loss of many billions of dollars during the coming decades.
The governor’s primary argument is simple: building a gasline means money and jobs for the state, so proceeding with a more favorable tax agreement to the developer is better than not proceeding under current tax rules. He also argues it will boost the state’s gas supply, thus offering lower power and heating bills for residents, as well as providing income through exported gas.
"But to get there we have to reduce the upfront tax burden so the project can be financed," he said in a video posted on his official Facebook page Wednesday. "Lower financing costs leads to lower energy costs. It connects directly."
A more stark declaration is made in a Department of Revenue fiscal note on Dunleavy’s bill, declaring "it (is) assumed that the Alaska LNG project will not proceed without property tax relief." The department's current estimated price tag for the project $46 billion; Glenfarne and other gasline supporters have during the past year announced numerous lucrative prospects, including an agreement last June for "over $115 billion of Strategic Partner Interest."
The governor’s House Bill 381 (and companion Senate Bill 280) exempts the Alaska LNG project from taxes for a decade construction and startup period — unless — and then exempts the pipeline from property taxes, instead imposes a tax on the volume of gas flowing through it.
A press release issued by the governor’s office last Friday asserts "the Alaska Department of Revenue estimates the legislation can raise more than $26 billion in tax and royalty revenue over 30 years, including more than $22 billion in state revenue (and) nearly $4 billion in local revenue."
But a different aspect of those figures was contained in a presentation by the Department of Revenue to the House Resources Committee on Wednesday: Dunleavy’s bill would mean a 90% reduction in property tax revenue when the pipeline is operating at full capacity, and municipalities with pipeline infrastructure on their properties would get $13 billion less revenue than they would under current taxation.
Discussions with municipalities about the impacts of the tax cut in an effort to resolve concerns are ongoing, said Mark Begich, a former U.S. senator hired by the Dunleavy administration as an LNG project consultant and advocate, during Wednesday’s hearing. Among the possibilities, Begich said, is an equity stake in the gasline for municipalities in exchange for the property tax exemption.
A competing — and complex — bill involving the Alaska LNG Project has been introduced by Senate Majority Leader Cathy Giessel, an Anchorage Republican. She is calling Senate Bill 275 “The Alaska Gasline Transparency and Accountability Act,” and asserts in a sponsor statement "It is increasingly uncertain whether Alaskans can expect net gains from a gasline."
"The massive influx of outside workforces and business activity will burden Alaska’s already-fragile public services while also increasing costs of housing, goods, and essential services," she wrote. "Without changes to law, it’s not clear that the state will see substantial new revenue from this project that could offset these costs."
Among SB 275’s provisions are expanding legislative oversight by allowing access to confidential project information, and increasing disclosure requirements about project investors and partners. It also makes revenue reforms, including eliminating some tax deductions and altering how royalty payments are calculated.
SB 275 had its most recent hearing in the Senate Resources Committee last Friday. The first Senate hearing on Dunleavy’s tax cut bill is scheduled at 3:30 p.m. Friday by the same committee.
• Contact Mark Sabbatini at editor@juneauindependent.com or (907) 957-2306.
