Alaska's Economic Future: Time to wake up
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What kind of Alaska will my grandson Wyatt inherit?
February 4, 2010: On Tuesday, Democratic state lawmakers held a press conference at the state capitol claiming the Alaska Support Industry Alliance is misleading Alaskans with it's current ad campaign.
The Alliance, an oil field support organization of 500 companies, began running a television ad campaign recently that highlighted the jobs lost in Alaska's oil patch due to higher taxes passed two years ago by former Governor Palin with help from Democrats who actually argued for higher rates on the industry.
After all these were the same Democrats including Les Gara (D-Anchorage) who when asked about the tax hike after it passed told the Anchorage Daily News, "It's the best we could do in this building." As if increasing industry taxes to one of the highest levels in the world wasn't enough.
The tax hike Gara was referring to was ACES, which was adopted by the legislature in 1997, the third and largest production tax increase in a 3-year period. It increased production taxes by 50% from 2007 and 350% from 2006 based on an $80/barrel market price, and includes an aggressive "progressivity" formula that boosts the tax rate as oil prices increase.
With current prices of about $80/barrel, the production tax alone is 40% of net revenues, and the total government take is 70% (including state royalties, production tax, state income tax, state property tax, local property taxes and federal income tax).
And while lawmakers like Gara have been vocal about sticking it to the man up on the North Slope, they've remained deathly silent about what Alaska needs to do to fund state government as production and revenue from it's biggest taxpayers begins to drop.
North Slope oil production is down 100,000 barrels since 2007, the year ACES was enacted. The pipeline is operating at less than a third of capacity, resulting in operational challenges that will only become more formidable over time.
During Tuesday's press conference, Democrats gave an encouraging picture of Alaska’s economic status and jobs climate since oil tax reforms became law. However in doing so, they themselves offered up misleading information to the public.
“When oil investment and jobs have increased, oil companies should tell the truth, even if it hurts their call for more tax breaks,” said Rep. Gara. “ Exxon, Conoco and BP are needed in this state, but they should concede, not deny, what their reports say – that they’ve made billions in profits under Alaska’s oil tax and investment incentive laws.”
Gara cites the report issued by the Department of Revenue and oil company revenues as his basis for belief that everything is working well. Unfortunately, Gara tends to leave out the critical facts that cast a different light on his pitch.
While the DOR did say employment and investment were at a all time high, they also stated that the increase in investment and jobs did not translate into companies investing in more drilling.
The industry has argued that the spike in employment has been due to a ramp up after major pipeline spills in 2006 and as the repair work is finishing up those jobs ill go away. Industry suppliers have complained for months that due to the decreases in exploration and development, drill rigs and staff are idled. In short, the spike in employment is masking the fact that these jobs aren't translating into more barrels of oil through the pipeline.
Even leading local economists have predicted a slow year for oil & gas industry employment. Marcus Hartley, a senior executive at Northern Economics said to expect energy companies to again delay investment in Alaska following a 2007 increase in oil taxes and the passage of the Alaska Gasline Inducement Act. "We really don't see positive signs, really, out there for oil and gas jobs," Hartley said.
The argument over taxes and their corresponding impact on development have become a perrennial issue in the legislature, but one that fails to do justice to a critical public policy debate.
We get it; Democratic lawmakers oppose any type of tax decrease for Alaska's largest taxpayer. They think regardless of the clear warning signs of economic weakening on the North Slope, that we're getting our fair share and nothing else matters.
This was displayed by the comments of Rep. Harry Crawford (D-Anchorage) who told the ADN during Tuesday's press conference, “Everything I’ve seen tells me more people are going to work, and more wells are being drilled. I want to work with the industry, but I expect them to be honest with the people I represent.”
Where did Rep. Crawford get the idea that "more wells are being drilled"?
If he had actually read the report that he and his colleagues touted at the press conference, he would have known what he was saying wasn't true.
According to the DOR report, the state approved 175 permits to drill in 2009, the lowest number since at least 2000. It was down from 203 permits in 2008 and 177 permits in 2007.
Fewer wells are being drilled...not more. That's a fact.
Wyatt giving his response to the Dems Press Conference
"More wells..whatchu talkin' bout Rep. Crawford?"
But more importantly, none of these Democratic lawmakers has offered up any ideas about the future, given every report from the Department of Revenue shows a serious production decline in just four years.
By fy2015, 38% of the oil Alaska will need to pay for state government hasn't even been discovered yet. A quick glance at the projections for oil projects under evaluation shows there is very little on the horizon.
So with the pipeline half full and revenues declining, what is the right answer?
Governor Sean Parnell's budget proposes to spend over $5.1 billion dollars this year in General Fund spending. This represents a 5.8% increase in spending and most of that comes from programs that have automatic cost increases like retirement programs and Medicare/Medicaid.
These programs will conitnue to grow and continue to eat up a large portion of the state budget as Alaska gets more diverse and older which means a greater dependency on government services.
Meanwhile, since almost ninety cents out of every dollar the state spends on educating kids, providing for the less fortunate and seniors comes from the oil & gas industry, the Democrats should be holding a press conference about how we pay for state government as oil productions falls.
If Democratic state lawmakers oppose tax incentives to stimulate investment in Alaska that's their right. But it's Alaskan's right to know what the Democrats plans are to grow the economy, absent adopting incentives for the state's largest taxpayer.
So far, their ideas seem to have nothing to do with growing jobs and more to do with growing government obligations.
A few weeks ago, Democratic lawmakers including Rep. Crawford proposed enshrining the annual dividend payout in the constitution. What's ironic is while they admitted that things are going to get tougher with declining oil production, their immediate response was to constitutionalize a yearly entitlement program instead of proposing solutions to get people to work.
Alaska's December unemployment rate is at a eighteen year high, industries beyond the oil & gas sector like tourism and food & beverage are hurting due to a weak global economy, meanwhile cost of state government will rise over 5.8% this year.
Again to my Democratic friends...what's your plan for Alaska's future and how do you intend on paying for it without oil?
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