Alaska senators moved forward a new version of Gov. Mike Dunleavy’s tax bill last week. The newest draft of Senate Bill 227 bears little resemblance to the bill the governor proposed earlier this year as part of his broader fiscal plan.
Most significantly, the new version advanced by the Senate Resources Committee on Wednesday includes a major overhaul of the state’s oil tax system. The bill would replace the state’s production tax, based on net profits and subject to numerous deductions and credits, with a flat 17.5% tax on the gross value of the oil as it comes out of the ground.
Anchorage Democratic Sen. Bill Wielechowski proposed the oil tax change, saying it’s an approach that has worked well in oil-rich states like Texas and North Dakota. Alongside the state’s minimum 12.5% royalty, Wielechowski said it would mean Alaska would take about a third of the value of each barrel of oil.
“The reality is, if we're getting a combined gross of right now, 16%, roughly, and every other state is getting close to 30%, I don't think we're maximizing the value of our oil as we're required to under the Constitution,” Wielechowski said.
Opponents of the gross value tax, including oil companies, argue the high costs of drilling in Alaska mean such a tax would make the state a less attractive place to invest.
In another major change, the Senate Resources Committee’s version strips out the governor’s sales tax proposal, which received fierce criticism from legislators, local leaders and the public. It also dispenses with the governor’s proposal to end corporate income taxes in the early 2030s and would make oil and gas S corporations subject to corporate income taxes. That’s an effort to extract additional revenue from privately held oil and gas company Hilcorp, a longtime priority of Wielechowski and other Senate majority members.
The bill would also add a $20 to $60 yearly income tax to support public education modeled off a similar “head tax” eliminated in 1980.
Anchorage Republican Sen. Cathy Giessel, who chairs the committee, said at a hearing Wednesday that she had some reservations about the oil tax change, but with declining savings, she said the state badly needs more revenue to address its long-running structural deficit.
“The fact is, we are at the fiscal cliff that has been foretold for at least the last 10 years,” Giessel said. “We're not just at it anymore. We are falling over it.”
The new Senate version also drops some must-haves from Gov. Dunleavy’s fiscal plan. Dunleavy’s tax plan was linked to limits on state spending, a periodic review of state agencies and a constitutionally guaranteed Permanent Fund dividend. But with senior senators skeptical of those limits, the new version of the tax plan would stand alone.
Fairbanks Sen. Robb Myers, a minority Republican, said that means the bill no longer addresses the issues the governor's fiscal plan was intended to solve — that is, making the state’s budget more stable and less vulnerable to wild swings in oil prices.
“Oil money and the patterns that it creates is what got us into this mess, and without a full fiscal plan, simply increasing oil taxes and a little bit of corporate tax, to me, is the financial equivalent of trying to cure a hangover with a shot of vodka,” Myers said. “We're going the wrong direction here.”
Dunleavy’s office did not respond to a request for comment.
Bipartisan majority members passed the bill out of the Senate Resources Committee on a 5-2 vote on Wednesday with the two minority Republicans opposed. Myers and Sen. George Rauscher, a Sutton Republican, said they were also concerned Giessel hadn’t provided economic modeling that would outline the impact of the bill.
The bill now heads to the Senate Finance Committee, where Giessel says she expects senators to take a closer look at the bill’s impact. Senate leaders said earlier this year that finding new revenue was their top priority. But Sen. Bert Stedman, a co-chair of the Finance Committee, said earlier this month he wanted to ensure any tax changes wouldn’t slow a boom in North Slope drilling.
“I think that we need to be careful that we don't derail our expansion in the oil belt,” Stedman said.
