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Alaska Enacts New Tax on ‘Windfall’ Oil Profits

2 min readBy: Andrew Chamberlain

Forbes reports the Alaska state senate voted 15-4 yesterday to revamp the state’s oil and gas production taxes, including a new taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. with a sliding rate that rises along with oil prices. According to lawmakers, the move is aimed at boosting the state’s share of profits when oil prices are on the rise:

The [new] tax would replace Alaska’s current production tax and would set a base tax rate of 22.5 percent of the Alaska profits of oil companies…

The tax rate would increase by .1 percent for every dollar per barrel when the price of oil goes above $35 per barrel after the companies’ costs. Since the cost of producing a barrel of oil is about $15 per barrel, that means the tax rate escalator would kick in at when oil is about $50 per barrel.

At today’s oil prices, state economists estimate the tax would raise $1.2 billion or more next year above what Alaska collect now.

However, analysts are already casting doubt on the official revenue projections from the new tax, primarily because it relies on highly uncertain projections of future oil prices:

Nobody really knows how much extra cash a proposed oil tax would bring Alaska. But that hasn’t stopped the guessing. Each new version of the petroleum production tax bill is quickly followed by estimates from consultants of both Gov. Frank Murkowski or the Legislature on how much tax revenue it would produce.

One says that at $60 a barrel, the state’s take will average $1.6 billion a year above what the state collects now over the next 10 years. Another says the state take will be an average $1.4 billion a year more than the current system over the next six years at $60 per barrel.

They’re both wrong…

The problem is the cost assumptions. Nobody knows what the future oil prices will be, what the equipment will cost or how much will be invested to develop a field.

Read the full text of the Alaska senate bill here. Read another summary of the bill here. For our previous research on oil and gas taxes, see our “Gasoline Taxes” section here.