Oct 18: Getting Real With Gatto On PPT
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On Monday, State Representative Carl Gatto published an opinion piece in the Frontiersman concerning his view of PPT and the upcoming special session. Since Rep. Gatto's opinion column asks Alaskans to speak out on PPT, I have obliged with my comments woven into the text of his comments. Alaskans Urged to speak out about PPT As Alaskans consider the issues before us in the special session in Juneau, we know pretty well that most of the revenue that pays for state services comes from the oil owned by all Alaskans in common. Reply: Over the last five years oil tax revenues have grown 192%. Oil tax revenues represent roughly .90 out of every dollar the state spends. In the last five years since Rep. Gatto has been in the legislature, state spending has almost doubled while state savings have been nil. The state is aware that pumping oil from the North Slope is expensive and has done something about it. Under the existing Petroleum Profits Tax (PPT), those expensive costs are deducted before arriving at the profit. After reaching the profit dollars and the taxes rate, producers get an additional 20 percent tax credit for exploration. Reply: Exploration is only a small part of the cost of developing oil fields. Once a discovery is found, the majority of cost is in development and production. Meanwhile, the proposed ACES plan would increase taxes on production and weaken existing tax credits. That’s 20 percent right off the tax. Not bad so far, but the producers get to claim things that are quite misleading in order to inflate their contribution to the government beyond what it really is. They do this by calling the one-eighth royalty a tax. It isn’t. If one defines the one-eighth royalty Alaska receives as a “tax,” then the total government take may, at first, seem unreasonably high. But Alaska’s royalty is not a tax; rather, it’s exactly like the oil royalty paid to a private landowner in Texas. A royalty is not a tax any more than the royalty that an author receives from a publisher is a tax. A royalty is nothing more than Alaska’s fair share of the resource it owns. Reply: A royalty is a tax. And even if you want to say it isn't, the reality is it is part and parcel to analyzing investment decisions because it represents another part of government take which all factors into a cost of doing business on the North Slope. Reply: In fiscal year 2007, oil companies paid the State of Alaska $4.3 billion in oil taxes and royalties. $2.2 billion in production taxes, $1.5 billion in royalties and another $600 million in corporate income taxes. According to Department of Revenue Commissioner Pat Galvin, governments current take under PPT is between 62 and 64%. This again is a key component when companies look at where to put their investment dollars. By ignoring additional tax obligations to the Federal government or local communities, Gatto ignores the fact that Alaska competes in a global market where new investment dollars have options. In addition, Gatto ignores the thirty thousand jobs the industry provides through service related and support companies that don't pay taxes but are the foundation of the state's economy. Reasonable people will recognize oil companies are not suffering. Chevron, for example, is using its generous cash reserves not to explore and drill in new areas, but to buy back outstanding Chevron stock, a sure sign of a company alert to opportunities to increase its stock price. Reply: Excuse my bluntness, but this is a very uneducated comment. In fact Chevron has announced plans to invest $250 million in improving technology and upgrading their drilling infrastructure in Cook Inlet. In addition, they have announced plans to explore in the White Hills prospect just south of Kuparuk. Meanwhile at the same time, Gatto and the legislature are considering raising production taxes and weakening investment credits. Most new wells drilled by North Slope oil companies are drilled in the existing Prudhoe fields to increase the amount of oil extracted from known accessible areas. But we must insist that the companies explore in new areas. That’s why we reduced their taxes an additional 20 percent in the form of a credit and why the state is essentially paying 20 percent of oil exploration costs in addition to the deductions for the cost of exploration. Reply: In field drilling, (what Gatto refers to) has been the most successful production strategy to slowing the rate of decline in oil production. Today, in field wells contribute 70,000 barrels of oil per day which equates to the fourth largest field on the North Slope. In addition, if Gatto wants to “insist that companies explore new areas” he's not going to accomplish that by raising production taxes for the second time in two years and gutting investment incentives. Oil companies always make money because they are carefully structured to be vertically integrated. When prices are low they still make money on pipelines, tankers, refineries, delivery trucks and the numerous gas stations they own. Stock market and annual reports are good indicators of the value of an oil company and those reports show that the industry is doing very well. Stock prices of oil companies continue to beat the market, a sure sign they are prospering. At today’s prices, everyone with oil is doing very well. Reply: Again, this is a very uneducated comment. Gatto wasn't in the legislature when oil was $9 per barrel. In addition, when the oil companies do well Alaskans do well not only through increased corporate taxes and the availability of capital investment dollars, but the second largest holding of the Alaska Permanent Fund Corporation is Exxon. Also, government takes absolutely no risk while the private sector takes it all. Alaska is a high risk, high reward investment environment. Just ask Shell Oil who after investing $250 million, hiring hundreds of Alaskans and having a fleet of ships preparing to go to work were shut down by lawsuits filed by the North Slope Borough. The oil companies are saying through their radio and TV ads that we added a billion dollars last year. If that were so we would not be going to special session. Finally, changing PPT cannot occur without a majority vote from both bodies of the Alaska State Legislature as well as the concurrence of the governor. Today, we have the governor’s proposed legislation, a measure that asks for fairness in taxation. I ask Alaskans to step up to the plate and speak out. Your testimony is no less important than input from the government and the oil companies. Reply: According to the Department of Revenue, production taxes increased from $1.2 billion in 2006 to $2.2 billion in 2007. Before I press the yes/no button to alter Alaska’s tax revenue, I will have fairly and thoroughly considered the pros and cons of each point of view. Reply: Last year Rep. Gatto voted in support of the current PPT system. So did he not consider the pros and cons last year, or is this just another politician playing populist politics with Alaska's economic future? State House Rep. Carl Gatto is a Republican from Palmer. Related articles on PPT http://www.andrewhalcro.com/oct_17_out_to_lunch_and_not_coming_back http://www.andrewhalcro.com/oct_15_palin_and_her_disingenious_rhetoric_on_ppt_will_it_never_end http://www.andrewhalcro.com/oct_14_the_aces_roadshow_-_welcome_to_fantasy_land http://www.andrewhalcro.com/oct_7_adn_op/ed_raising_oil_taxes_again_risks_alaskas_economic_future http://www.andrewhalcro.com/sept_28_palin_ppt_and_alaskas_economic_future http://www.andrewhalcro.com/oct_4_is_ppt_really_broken_or_is_aces_just_palin_populism_at_work http://www.andrewhalcro.com/oct_13_ktuu_news_halcro_speaks_on_ppt_corruption_factor
Rep. Carl Gatto (R) - Palmer
We also know that the oil companies don’t own the land or the oil beneath it. Alaskans own it and they get a one-eighth share of the underground wealth. The oil companies get 7/8 and that represents the lion’s share of the money.
Including the royalty share as a tax makes the state’s share of the revenue seem much higher than it really is. Inflating the term “total government take,” which is how the oil companies refer to all the money they do not get for themselves, does this. Also consider that federal taxes — which go to Washington, not Alaska — are also inappropriately included in the oil company description as “total government take.” Property taxes paid to boroughs where the petroleum industry’s pipeline and production equipment is located are also frequently labeled as “government take,” although the state receives none of that revenue either.
Before I vote on any revision to PPT taxes, the Legislature must have thoughtful hearings, including testimony from constituents. Our Resources Committee will cross-examine experts. We will thoroughly review state input and documents comparing Alaska’s taxes to other governments. The oil companies will send their best to Juneau to present testimony supporting their point of view.
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