JUNEAU, Alaska — Over most of the last several decades, Alaska’s North Slope was America’s energy powerhouse. The legendary oil fields of Prudhoe Bay and Kuparuk gushed 2 million barrels a day out of the frozen tundra and down the Trans-Alaska Pipeline.
The state abolished its income tax and paid its citizens generous annual oil dividends. Then in an alliance with Democrats that enraged the GOP old guard, former Republican Gov. Sarah Palin in 2007 helped push through an unabashedly liberal tax regime that boosted oil-production taxes, in some cases as much as 350 percent above 2005’s levels.
The legislation, the largest tax increase in Alaska’s history, was a part of the Palin story many outsiders never heard about. The “Last Frontier” largely skipped the recent recession and went into its current budget with $17 billion in the bank.
But now in a bid to hold on to revenues that are the bedrock of the state budget, lawmakers in Juneau are in an intense fight over the future of oil finance, with an emboldened Republican majority moving to roll back the Palin tax hike by up to $5.8 billion over the next six years.
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The reason: Somewhere along the way, the North Slope golden goose stopped laying. Production on the aging fields has dwindled to barely a quarter of what it was in the 1980s.
Once the nation’s largest oil producer, Alaska now ranks behind Texas, North Dakota and California.
Democrats are trying fiercely to hold on to the tax, accusing the oil industry of buying influence in the last state elections — two of the state’s 20 senators are employees of ConocoPhillips, and Gov. Sean Parnell, a strong proponent of the tax cut, is a former ConocoPhillips lobbyist.
The Democrats also charge that the oil industry is holding the state hostage by refusing to drill without lower taxes.
“We were just about broke in 2006. We’ve now got the largest savings account in the United States. And we’re talking about giving that away?” Democratic Sen. Bill Wielechowski argued as the Senate voted 11-9 last month to send the tax-cut bill to the Republican-dominated House of Representatives.
Both sides are predicting that the state could be headed for ruin. Democrats say it will happen if the oil companies are no longer forced to pay up. Republicans warn that the real threat is a decline in production so precipitous that there will no longer be any oil left to tax.
“Our savings will have to be spent to cover the deficits, and then we’re out of money,” said Republican Rep. Eric Feige, co-chairman of the House Resources Committee, which is currently hearing the tax-cut bill. “You have a fiscal cliff of epic proportions, and in about 10 years, it really puts into question whether the state can provide even the basic government services.”
Oil company executives have warned that capital is flooding to the new shale booms in North Dakota and Texas, where there is more tax certainty. The controversial progressivity component in Alaska’s taxes — which substantially raises the bill when oil prices go up — leaves companies guessing from month to month what their tax bill will be.
“I was talking with a gentleman from BP, back in 2008 when oil prices spiked. He didn’t have authority to sign the checks to pay the tax each month. He had to get authorization from London, the checks were that big. And he was the chief financial officer,” said Joe Balash, deputy commissioner of the Department of Natural Resources.
“Alaska’s fiscal regime is just broken,” Dan Seckers, tax counsel for ExxonMobil, said in testimony before the House Resources Committee at a hearing last month.
Oil companies have said they generally favor something resembling the Senate bill, which sets an initial base tax rate of 35 percent, no matter what the price of oil, and provides a gross revenue exclusion for producers who develop new North Slope oil.
But most say the 35 percent tax is still too high, and none have committed to new investments even if the tax law passes. This is a source of irritation for Democratic Rep. Chris Tuck, who took the industry to task at the hearing. “It’s not that you guys haven’t been profitable in the state of Alaska,” Tuck said. “You’ve been very profitable up here. It’s just not as profitable as you would like it to be?”
“Yes, we have made investments here and we want to continue to make investments here. Our hope is to make more, if the fiscal regime gets improved enough to allow that to happen,” Seckers said. “I want you to beat North Dakota. I want you to beat Texas. We all want Alaska to be first.”
Wielechowski said the big oil companies have tried to paint a picture of declining investment, but that jobs have expanded and capital expenditures have doubled on the North Slope since the Palin tax hikes took effect.
Reversing them, he said, would result in a “massive giveaway” of public resources to companies that became some of the richest in the world, in part, by pumping Alaskan oil.
“We’re not acting like an owner state,” he said in a speech on the Senate floor. “Instead, they come to us and tell us to give them tax breaks, and we say, ‘How much?’ And they say, keep going down and we’ll let you know.”
But Republican leaders say the long, slow oil decline could become fatal if the state fails to act.
“The goal is more investment, as soon as possible, to get more oil in that pipeline,” House Majority Leader Lance Pruitt told reporters Friday. “We can’t wait any longer.”