The TransAlaska Pipeline System is in trouble. During its 1970s heyday, 2 million barrels of crude coursed through it every day from Alaska's northernmost oilfields to the southern port in Valdez. Now that flow is down by more than two-thirds. The pipeline was not designed for lean times. If the volume of oil declines again by half, Alaska's mighty petroleum artery will inevitably clog with ice and sludge, its steel walls collapsing under the strain of scarcity.
A similar fate could befall Alaska's entire economy, which depends to a perilous degree on a steady supply of oil from fields that simply don't yield as much as they used to. Oil companies complain that Alaska's high taxes discourage them from investing in new technology to coax more oil out of old fields. Lower the tax, they say, and they'll find more oil.
And so it was with the explicit goal of jump-starting production that Alaska lawmakers in April voted to roll back the state's steep oil severance tax -- the tax imposed for "severing" minerals from the ground -- and replace it with a tax that Alaska Gov. Sean Parnell says will build "a prosperous future for generations of Alaskans."
Other perspectives are less rosy: The new tax, says Rep. Les Gara, an Anchorage Democrat, says, could cost the state $2 billion a year.
Severance taxes, which can apply not just to oil but to natural gas, coal and gold, have a long history in the West, balancing state budgets through recessions and keeping them independent of excessive federal largesse. Alaska's current debate breaks down along party lines -- only two of 11 Republicans in its Senate voted against the new law. And yet a severance tax has never been a particularly liberal idea. Red states embrace the notion more often than blue ones do, as a way of lowering the tax burden on individuals. And it was Gov. Sarah Palin who in 2007 championed the previous progressive tax, "Alaska's Clear and Equitable Share," or ACES.
ACES was passed, says Anchorage-based petroleum economist Roger Marks, "in an atmosphere of extreme paranoia," as corruption charges were leveled against state lawmakers accused of openly colluding with industry lobbyists (three were indicted and later convicted). Palin and her bipartisan allies responded to the scandal by instituting a tax rate that started at 25 percent of net profits and began to rise when net profits exceeded $30 a barrel. "It made the burden very, very high for oil companies," Marks says. "What they walked away with after taxes was much less than what they walked away with in some other places."
Ordinary Alaskans, on the other hand, walked away with more than ever. In 2008, when oil shot to $130 a barrel and stocks were crashing elsewhere, each Alaskan earned a special $1,200 bonus in addition to that year's $2,069 payout from the state's permanent fund dividend program.
Severance taxes not only spread the wealth, they spread income from finite resources more evenly across boom-and-bust years. Texas, with its 4.6 percent tax on gross profits from oil and 7.5 percent on natural gas, has $10 billion socked away in a "rainy day" fund in anticipation of the oil drying up. Meanwhile, California, the fourth-largest oil producing state and the only one without a severance tax, struggles to balance its budget despite a hefty personal income tax.
Alaska saved up $17 billion during the ACES years. Oil's contribution to the state's permanent fund totaled $915 million in 2012 -- twice what oil brought in seven years earlier (the fund's balance, which also depends on investment performance, has grown 27 percent since 2007, to $47 billion). Gara worries the Legislature will exploit those savings -- that a rainy day has been forced on Alaska citizens before its natural time. "We have record employment on the North Slope," he says. "Statewide we have some of the lowest unemployment in our state's history. And now Governor Parnell has built us an artificial fiscal cliff."
The most significant difference between ACES and the new tax is that it sheds the progressivity -- the rate starts at 35 percent of net profits and stays there. The effective tax rate -- the actual tax paid on gross production value -- could dip under 20 percent. If that still sounds high, it is: Headwaters Economics, a nonprofit that studies Western land-use issues, puts Wyoming's effective tax rate for oil and natural gas at 11.4 percent, the highest in the Lower 48. Wyoming, however, also has coal and a 4 percent sales tax to feed its revenue stream; Alaska relies almost exclusively on oil. When the price of North Slope crude fell abruptly in 2009, the state budget went from a $390 million surplus to a $1.25 billion shortfall in a matter of months.
Will the new tax spur production? Headwaters Economics policy analyst Mark Haggerty thinks it won't. "Geology, technology and price drive production," he says. "Those factors are so big that marginal differences in tax policy don't matter." In 2007, for instance, North Dakota adopted a "tax holiday" to draw investment on the Bakken Shale away from Montana. But production shot up even after the incentive expired, for the simple reason that "the average well in North Dakota produces twice as much as the average well in Montana," Haggerty says.
Even Scott Jeffson, vice president of external affairs at ConocoPhillips, Alaska's largest oil company, stops short of claiming the new tax will feed the aging pipeline. As he told the state Senate Finance Committee in March, "We are not in a place where we could say how much we would do differently." Oil companies still earn plenty in Alaska, despite the production decline. For the quarter that ended March 31, ConocoPhillips posted $540 million in profit from Alaska's oil fields -- and that was under the higher tax rate.
The loss of revenue, however, will make a difference to Alaskans. "It means no money for new teachers, less money for construction, less money to shore up our infrastructure," Gara says. "Maybe the governor honestly believes that if you give oil companies a $2 billion tax break they'll reinvest it in Alaska. I don't."