Homer Alaska - Business

Story last updated at 7:44 PM on Wednesday, April 6, 2011

Alaska 'open for business,' says national group

By Andrew Jensen
Morris News Service - Alaska

A recent report ranking Alaska second in the nation for business tax climate has generated some controversy during the debate over Gov. Sean Parnell's proposal to lower taxes on oil production.

Sen. Hollis French, D-Anchorage, one of the most vocal opponents of Parnell's plan, put out a press release March 23 touting the Tax Foundation report as showing the state is "open for business."

The Tax Foundation, a Washington, D.C.-based nonpartisan, nonprofit organization founded in 1937, put Alaska second behind South Dakota in its 2010 Business Tax Climate rankings.

Those in favor of Parnell's plan, such as the Alaska State Chamber of Commerce, pointed to other studies giving Alaska low marks for business climate, including a recent CNBC report putting the state last among 50 states.

French said he pushed the Tax Foundation results in response to advocates for lower oil taxes who argue that Alaska's Clear and Equitable Share, or ACES, has driven away investment and exploration as throughput in the trans-Alaska pipeline system continues to decline.

"There's this drumbeat of negativity from a lot of different areas," he said. "I didn't write this report. I just get their little booklets in the mail. It's amazing the pushback, these wringing denunciations of it."

State Chamber President Rachael Petro said it was "disingenuous" of French to say Alaska is open for business based on a study that didn't rank the state based on its oil tax regime, which accounts for about 90 percent of revenue.

Petro said oil support businesses enjoying the favorable tax treatment are suffering due to high taxes on oil production.

"That's where our problem is," Petro said. "While our tax climate is positive, they are moving assets and people to the Lower 48. It is absolutely critical we address oil tax reform. We need to be partnering with these folks, rather than inviting them to dinner, asking them to bring dinner and serve dinner and to wash the dishes."

Alaska's No. 2 ranking was based on five factors: individual income tax (No. 1), state sales tax (No. 5), property tax (No. 12), corporate income tax (No. 26) and unemployment insurance premiums (No. 31). Alaska has no state income or sales tax.

Tax Foundation staff economist Kail Padgitt, who compiled the report, said Alaska's ranking should be interpreted as applying to non-oil production companies.

"The worry with taxing businesses is that businesses are mobile," Padgitt said. "You worry about taxing mobile forms of capital. That's why you see different taxes have different effects on growth. Alaska is able to use the fact it has a resource that is non-mobile, and it taxes that, and that is able to lower taxes on the rest of the citizenry.

"Overall, that's good for its business taxes, but long-term if oil is slowly depleted it could be not the best long-term strategy for the state," he added.

Padgitt said Alaska has advantages over other oil-producing countries because of its stable political environment amid increasing world turmoil, but that "the severance tax has to be put in the negative column, and up until the point it becomes cheaper to go to another country, Alaska will have that advantage.

"The question is where is that line going to be? That's a risk Alaska takes going forward, especially as technological improvements come on line, those are advantages that Alaska has to worry about," he said.

Tax ranking

French, in an op-ed published March 29, cited the 2010 Fraser Institute Global Petroleum Survey in asserting industry is not opposed to ACES. French wrote that industry insiders were surveyed "about whether ACES is working or not" and that "fully 70 percent said ACES either encouraged investment or was no deterrent to investment."

However, the study did not specifically ask about ACES. It asked 645 respondents to rate 133 oil and gas producing jurisdictions based on fiscal terms (oil-related taxes) and on taxation regime (all other forms of taxes) among 17 factors.

About 60 percent of respondents were either managers or officers of upstream petroleum companies, with the remainder being analysts, consultants or advisers. The Fraser Institute said the companies surveyed represented about 60 percent of the total spending on oil exploration and production worldwide in 2009, according to the International Energy Agency.

On fiscal terms, 40 percent said Alaska's structure encouraged investment and 34 percent said it was not a deterrent to investment. On taxation, 25 percent said Alaska encouraged investment and 31 percent said it was no deterrent.

Alaska's respective scores for fiscal terms (74) and taxation (56) stack up quite poorly when measured against other oil-producing states such as Louisiana (90/82), North Dakota (82/84), Oklahoma (92/86), Texas (95/91) and Wyoming (92/94).

There also is much more ambiguity about Alaska's tax structure. While 9 percent of respondents said Alaska's fiscal terms (severance taxes) were either a strong deterrent to investment or they would not invest because of fiscal terms, none of the 645 surveyed said the same about Louisiana, North Dakota, Oklahoma, Texas or Wyoming.

In fact, the survey actually rated the outer continental shelf off Alaska's coast as a better investment climate, an area where no drilling is currently allowed.

Overall, Alaska was ranked No. 68 among 133 jurisdictions and OCS-Alaska was ranked No. 57.

Of the top 20 percent of jurisdictions ranked, 14 of the 24 were in the United States. Alaska was ranked in the third quintile, one of just seven U.S. jurisdictions to be rated so low.

One area Alaska scored extremely well was in quality of geological database, with 95 percent of respondents saying it either encouraged investment (58) or was no deterrent (37).

That combined score put Alaska ahead of Louisiana (90), North Dakota (86), Oklahoma (92), Texas (91) and Wyoming (90).

When asked why Alaska was rated so low by the Fraser Institute study he cited if ACES is not a factor, French said, "I would need to study it more. I just don't know. We are getting increased investment. We do have some promising prospects, we've got Repsol coming in. I'd just have to look more."

French was pointing to the entry of Spanish oil company Repsol to the Alaska market with the purchase of North Slope leases and a plan to spend $768 million on exploration in the next few years.

"If this had happened a year from now, that would be in my face round the clock as proof positive of new money coming into the state," French said. "But the governor isn't trumpeting this news because it doesn't fit within his narrative or anyone else's narrative."

While its ratings on fiscal terms and tax structure were well below its peers in the Lower 48 and around the globe, Alaska's score was also impacted strongly by very low marks on cost of regulatory compliance and uncertainty about protected areas. Alaska ranked below Yemen at No. 125 out of 133 on uncertainty about protected areas and No. 101 in cost of regulatory compliance.

The House Finance Committee approved Parnell's proposal, House Bill 110, March 29, sending it to the full House for a vote. The Senate is considering alternatives to more specifically encourage exploration.

French called Parnell's proposal a "blank check" to industry and said "a general reduction that the governor has proposed is not in the cards."

Petro said reforming ACES to lower taxes on oil production was "Economics 101."

"No nation has ever taxed its way to prosperity," she said.

Andrew Jensen is a reporter for the Alaska Journal of Commerce.