ACES & PPT: What should the legislature do? (read more)

As a contributor to the current debate over oil taxes and the potential impacts on future oil & gas development in Alaska, an email last week from a reader crystallized the approach we as Alaskans should be taking with this entire debate.

A thoughtful blog respondent named Steve wrote in and asked, “I really just have one question: What does Andrew Halcro think is an acceptable deal for the State to ask for?”

It's a great question and a good way to steer the dialog back to how we can light a candle rather than curse the darkness.

At the heart of any well thought out public policy is information. Facts and figures that proves a policy is both needed and beneficial to the public and the economy.

And while we all know that facts and figures can be interpreted differently by different people who may want to make a particular argument, the key is having the basic facts to begin the discussion.

Today we know that the figures about proposed state budget cuts were wrong. In addition, we know that the facts about the Matanuska Maid Dairy continuing being a big money loser were right. But far too often today we are sold public policy decisions based on politics instead of information.

The debate over PPT is no different. What we've done is allowed ourselves to get wrapped around the axle over should we or should we not raise oil taxes, without asking what kind of information do we have to make a good decision.

The truth is the state has very little information but seems intent on changing public policy regardless.

In fact the only firm data the state has shows PPT brought in a billion dollars in new tax revenue and investment has doubled.

One of the biggest reasons for increasing oil taxes has been that the state is not getting its fair share based on future revenue projections. But the fact is nobody knows for sure what the revenue picture will be because the state doesn't even have a basic understanding of the economics of last years PPT.

On the first day of the special session, State Senator Gene Therriault asked one of the international oil & gas consultants hired by the legislature, why they shouldn't just push ahead and change the tax structure. Pedro Van Meurs replied, “You haven't even done your first audit yet. You don't have enough information”.

The reality is, there has been a failure with regards to critical managerial aspects of the new PPT tax structure.

Over the last year since the adoption of PPT we have heard about loopholes producers are using to write off claims for shoddy maintenance. But the truth is the state has yet to formalize regulations concerning what is an acceptable write off, so how do they know? Over the last year we have heard about the producers gaming the system. But the truth is the administration admits they don't have the auditors in place to audit claims, so how do they know? In fact last year the Department of Revenue failed to ask for one dime for additional auditors to do the work.

In an October 13 column, Fairbanks Daily News Miner Dermot Cole pens one of the most insightful pieces published regarding the current oil tax debate.

In his column, Cole writes, “Our failure to collect accurate information over the decades is the major reason why every discussion of oil taxes becomes an exercise in oversimplification”.

Cole goes on to write, “changes in the tax percentages are worth considering, but it's more important to create the conditions necessary for intelligent debate.”

And lets face it, in this drive by shouting environment, who wouldn't like some intelligent debate.

The fact is out dated rules have handcuffed the state from gathering important information combined with last years shift to a new tax structure have left legislators and the executive branch at what Cole appropriately called an “information deficit”. It's time to close the deficit so we can have an intelligent debate.

While some have argued for a straight gross tax on oil production, most economic experts have stated that adopting that method would harm desperately needed future investment. Even Governor Sarah Palin who advocated strongly for a gross tax, was “dragged kicking and screaming” back to the net tax in her ACES proposal. Given the type of reserves and where they are on the North Slope, a straight gross tax is not plausible. Once you begin offering necessary credits and incentives for more expensive development efforts including heavy oil, you're right back to basically a net system.

There is no question with a net system you need more information from tax payers and more enforcement to audit tax returns. The best way to protect the state is to close the information deficit so the Department of Revenue has a better handle on costs projections and can more accurately determine if the current PPT system is working.

So again, what do I think is an acceptable deal?

To begin with I believe the legislature should adopt the informational tools proposed in the governor's ACES plan. There are viable ways to protect proprietary information between producers while supplying the state with much needed information to determine the effectiveness of the most important tax policies in the state.

Under the existing system, producers make monthly estimated payments on oil taxes, however they are only required to submit cost information at their end of the year filings. Since there are differences in how individual producers submit cost information, a standardized system with forward looking cost estimates on a more timely basis would greatly enhance the Department of Revenues ability to predict revenue and again, provide critical information necessary to accurately judge the state's tax policy.

The state must also move quickly on hiring more auditors. Over the last decade, state salaries in most management areas have failed to remain competitive due to budget constraints and the results have been predictable.

Being an owner state means we have the responsibility to manage our assets.

Trying to ignore that responsibility by adopting tax policies based on simplicity rather than economics is just plain bad management.

The administration should also work quickly to finalize regulations clearly defining what are acceptable write offs to protect the state's interests. In addition, the State should adopt heavy penalties against producers who are found guilty of over claiming tax credits. Instead of burdening the courts, the legislature may want to consider creating a review panel to expedite the review of claims and appeals so disputes don't drag on for years.

Many advocating changes or a shift to the gross were critical of the initial PPT legislation to begin with. They're using a few bad apples and the state's glaring lack of economic data as their way to discredit the process and the product. However the question remains, why would you change such a critical public policy when you admit you don't have enough information?

With oil production declining faster than predicted, in just five short years 40% of the oil Alaska will be counting on to pay for state government hasn't even been discovered yet. That means Alaska must attract billions in new investment to keep us afloat.

Don't you think the owner state should have important economic data before we overhaul oil taxes for the second time in two years?

When PPT was passed last year there was a review date of 2011 included in the legislation. The idea was that the state would have gone through at least two audit cycles and would have the information necessary to evaluate the new tax structure.

Until the legislature has filled the void of the information deficit and given the administration stronger management tools so they can answer basic questions about the true results of PPT, we should hold off overhauling the current tax structure.

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