Alaska Voters to Decide Oil Production Tax Changes

August 18, 2014

Alaska voters go to the polls tomorrow to decide Measure 1, which would change taxation of oil production. A yes vote repeals the More Alaska Production Act (MAPA) tax system championed by Gov. Sean Parnell (R) and passed in 2013, instead reinstating the previous Alaska’s Clear and Equitable Share (ACES) tax system pushed through in 2007 by then-Gov. Sarah Palin (R) in 2007. A no vote keeps the MAPA tax system.

Alaska has imposed a severance tax on oil production ever since sizeable extraction began in the late 1970s, which enabled Alaska to be the only state to repeal its state income tax. Over time, Alaska has collected $191 billion in oil production taxes, including tens of billions set aside in the Permanent Fund, with some of that paid to Alaska residents annually as dividends. Historically, the tax was structured as an Economic Limit Factor (ELF), which adjusted tax deductions to result in high taxes on highly productive oil fields and low taxes as a field’s profitability drew down.

Alaska oil production peaked in 1988 at about 2 million barrels a day and has declined since, to about 500,000 barrels a day today. With production declining and oil prices soaring, Alaska in 2006 adopted the Petroleum Profits Tax (PPT), which doubled taxes by consolidating tax calculations for various fields into regions and taxing the value of the oil and gas produced, with a higher tax when profits exceeded $40 per barrel. Continued soaring oil prices led to the enactment of the ACES system in 2007, which doubled taxes again by disallowing a number of production cost deductions, increasing the base tax rate to 25 percent, and taxing profits more heavily when they exceed $30 per barrel. These taxes are in addition to state and federal corporate income taxes.

Production has continued to decline under ACES, while production in Texas, Oklahoma, New Mexico, North Dakota, and Canada have grown sharply. Dividend checks mailed to each Alaskan fell from over $2,000 in 2008 to $900 last year, and the Trans-Alaska Pipeline is running dry. Governor Parnell blames the high taxes and pushed through SB 21 in 2013 to enact the MAPA system, which imposes a higher base tax rate of 35 percent but eliminates progressive add-ons. Parnell said the system is needed to encourage greater production, but opponents say it will sharply reduce oil tax revenue.

Polls show Alaskans almost evenly split on the measure, and signs and ads for both sides are everywhere in the state. It’s an important topic for the state because oil wealth has fueled much of the economic progress and state services for the last several decades. Unemployment in the state has crept above the national average for the first time in a long time, and anxiety is growing as production declines and other states surpass Alaska’s oil production. Both sides emphasize the importance of the oil industry to the state’s economic progress, debating whether taxing it very heavily is the right approach. Each voter may well be thinking the future of the state is in their hands with this vote.

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