Alaska’s Financial Future at Center of Battle Over Oil Tax

Grassroots groups fight to reverse an oil industry tax benefit worth $1 billion to $2 billion a year and to return the money to state coffers.

Supporters of the Vote Yes referendum, which seeks to repeal a recent tax benefit for oil companies, are seen here. Because Alaska gets 90 percent of its revenue from the oil industry, the architects of the campaign say the future of Alaska's economy is at stake in the August 19 vote. Credit: Vote Yes

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After decades of relative harmony between citizens and fossil fuel companies in Alaska, tensions are ratcheting up in advance of an Aug. 19 referendum on the state’s oil taxes.

Voters will decide whether to repeal Alaska’s year-old oil tax system, which cuts taxes on the fossil fuel industry by $1 billion to $2 billion a year. If Alaskans approve the ballot proposal, the state will reverse the tax reductions now enjoyed by ConocoPhillips, Exxon and BP and revert to a previous system that helped the state bank a $17 billion surplus.

At the heart of the fight is concern over Alaska’s financial future.

A coalition of grassroots activists argues that the tax cuts introduced in 2013 would devastate the state’s budget. With no income or sales tax, Alaska gets 90 percent of its revenue from the oil industry. But the financially and politically powerful fossil fuel industry says the previous, higher taxes choked its ability to invest in new oil fields and increase production.

The debate is raging across Alaska. Ad campaigns and opinion pieces clog TV, radio and newspapers. Campaign signs litter the streets, and home phones are ringing off the hook. Oil interests fighting the ballot measure have outspent advocates 25 to 1.

Voters were still closely divided in a late July poll: Forty percent of Alaskans said they would vote for repeal, 46 percent said they wouldn’t and 14 percent were undecided.

Considering how much the industry has spent, grassroots organizers say the level of support they’ve seen for repealing the tax cuts surprises them, said T.J. Presley, campaign manager for Vote Yes! Repeal the Oil Giveaway, the group behind the ballot initiative. It is because voters know just how vital oil money is for the state to function.

“One to two billion dollars a year for these oil companies is a drop in the bucket,” Presley said. “One to two billion dollars a year for Alaska is the difference between being in a deficit and not being in a deficit.”

What is happening in Alaska parallels a larger national fight. Environmentalists and the White House are similarly trying to reduce tax breaks for fossil fuel companies that they say aren’t needed and to boost government investment in renewable energy.

Two Tax Systems

Once the top oil-producing state, Alaska now ranks fourth behind Texas, North Dakota and California. It has one of the highest oil tax rates in the nation, even with the breaks introduced in 2013.

No matter which system is in place after the Aug. 19 vote, the assumption is that Alaska’s rich reserves will continue pumping oil. Neither side deals with what will happen to the state’s financial future if national climate legislation or a global climate treaty force companies to keep oil in the ground.

Under the current tax system introduced in 2013, the state requires oil companies to pay a flat 35 percent of their revenue to the state. That replaced a system signed into law in 2007 by former Republican Governor Sarah Palin. That measure, known as the Alaska Clear and Equitable Share Act (ACES), taxed oil-company profits at 25 percent, plus a significant surcharge per barrel when the price of oil exceeded a certain level. The more valuable oil got, the more extra tax oil companies paid, and the more revenue Alaska raised.

In the years following its passage, the tax bolstered Alaska’s finances. The price of oil jumped from about $60 a barrel in 2006 to more than $120 in 2008—and as a result, the state banked a surplus of $17 billion in six years.

At the same time, Alaska’s oil production continued a decades-long decline. Between 2007 and 2013, it fell by one-third. Republican Governor Sean Parnell, a former lobbyist for oil giant ConocoPhillips, sought the tax cut, known as the More Alaska Production Act (MAPA), arguing that it would spur new exploration and production.

ConocoPhillips did increase its investment in Alaska by 50 percent under MAPA, according to Andrea Urbanek, a spokeswoman for the company. If voters repeal the law, the company would “re-evaluate its North Slope investment plans,” she said.

“Projects were in fact put on the shelf under ACES [Palin’s tax system] and taken off the shelf under [MAPA],” said Kate Moriarty, president of the Alaska Oil and Gas Association, a coalition of energy companies. “The oil companies will continue to be successful; whether they are successful here in Alaska or somewhere else is the real question Alaskans need to consider.”  

Opponents of the 2013 tax reduction say those statements don’t add up. ConocoPhillips, for example, reported in July that its quarterly profits in Alaska were up, while at the same time production declined. 

Economists argue that keeping the current low-tax system could cost Alaska billions of dollars every year—a dangerous prospect for a state so reliant on oil taxes. Without more revenue, Alaska will have to cut billions from its budget. And without the financial cushion from the higher, Palin-era tax, the state won’t be able to explore diversifying its energy structure, as it should do to stay competitive and help fight climate change, Presley of the Vote Yes group said when asked.

Tight Campaign

Vote Yes gathered 53,000 signatures in 90 days to get the repeal referendum on the August primary ballot. With just days left in the campaign, groups on both sides are working frantically to win votes.

Industry groups have spent $15 million urging rejection of the proposition. The bulk of the money came from Alaska’s three biggest oil producers: ConocoPhillips, ExxonMobil Corp. and BP, Alaska Dispatch News reported in July. The rest came from companies hoping to get into the Alaska market, such as Repsol, and industry organizations including the Alaska Oil and Gas Association.

“We gave ACES [the Palin tax] seven years to work,” said Willis Lyford, campaign director for Vote No on 1, the industry coalition fighting repeal. “We need to give this new system a fair chance before we shut it down.”

Opponents of the new system have spent just $600,000. The group’s leaders are former Democratic state senator and signer of the Alaska constitution Vic Fischer, former first lady Bella Hammond, and former Republican lawmaker Jim Whitaker. Palin also threw her weight behind the repeal. With a smaller budget, the opposition movement has focused on door-to-door visits and phoning voters.

The future of more than just oil production in Alaska could be at stake, said Lyford, the Vote No director. Alaska is home to some of the world’s largest natural gas reserves. Tapping into them at a time when demand is soaring could help spur a new energy boom in the state.

“Industry isn’t ready to bail out on Alaska,” Lyford said. “But it needs to find Alaska an attractive place to do business.”

“No one has been able to say which way this going to go right now,” said Presley, the Vote Yes chief. “It is neck and neck. Each side is going to be recruiting voters until the very end.”