Sept 28: Palin, PPT and Alaska's Economic Future

“Frosty”, that’s how United States Senator Ted Stevens described the existing relationship between Alaska’s Congressional Delegation and Alaska’s Governor Sarah Palin.

After a week in which Palin offered a grandstanding performance where she demanded answers from Stevens regarding his much publicized investigation being conducted by the Department of Justice, many including myself are shaking our heads.

Just who in the world is Sarah Palin to demand answers from anyone?

This is a person who got elected by not answering questions and who continues to govern in the same manner.

From promised budget cuts that turned into record spending to a gas pipeline strategy that excludes the only people who can make a gas pipeline happen. From blatant cronyism and mismanagement by her friends running the Matanuska Maid Dairy to her most recent populist appeal, raising oil taxes for no legitimate reason, as it stands, it's Governor Palin who should answer some questions.

With every passing week it grows increasingly clear that this is an administration based on populism not policies. Just last week, Palin brazenly hijacked the announcement of this year’s dividend amount.

For over two decades the announcement has been part of the Alaska Permanent Fund Boards annual dinner. In fact, historically the Commissioner of the Department of Revenue announced the amount until two years ago when then Governor Murkowski announced it himself at the board’s annual dinner.

Apparently the historical format didn’t provide enough media attention for Palin.

Instead, she stiff armed the very people who manage the permanent fund and held a special press conference in Valdez to announce the amount.

A few days later, it took her less than an hour after the guilty verdicts were returned against former legislator Pete Kott on corruption charges to release a press statement expressing outrage. However when Agrium announced they were closing their Kenai fertilizer plant, it took much longer for the governor to say anything.

The fact is Palin has always been a one trick pony. If it wasn’t for the poor ethics of others, she’d have nothing of substance to say….ever.

She has benefited politically by criticizing unethical behavior for years and it remains the only card in her hand. However even reality didn’t stop her from recently claiming on the Eddie Burke talk show that she has “the most pro-development and fiscally conservative administration in the state’s history”.

Excuse me, what did she say?

First, her administration has taken spending to record levels after promising to cut the budget. In fact, even after approving a record operating budget, she eagerly supported a twenty million dollar entitlement program and never bothered to explain how she was going to pay for it. Second, she has been silent on Shell Oil’s predicament in the Beaufort Sea. Third, I wouldn’t call excluding the producers from bidding on AGIA while proposing to raise oil taxes for the third time in three years as pro-development.

We are quickly progressing to a point where Palin’s lack of knowledge about the economy and her addiction to press grabs will become more than simply annoying, it could become crippling to Alaska’s economy.

Let’s start with the call for a special session on October 18 and her proposal to raise oil taxes.

Why are we revisiting oil tax rates when the legislature over hauled oil taxes a year ago?

The answer is that Governor Palin feels the PPT process was tainted and the rate isn’t bringing in the revenue projected. Ignore the fact that there has been no evidence presented that any of those indicted or convicted had any impact on the final tax rate. In fact, all of those who have been indicted were conniving to get a 20% oil tax. The legislature approved a 22.5% tax with a .025 per barrel bonus tax for every dollar over $40 per barrel.

Ignore the fact that both Republicans and Democrats voted for the final tax rate and it passed by a comfortable margin. Ignore the fact that the new tax structure brought in one billion dollars more this year compared to last or the fact that next years claims that ppt revenues will be way off is based on $54 oil when in fact it’s at over $80.

But more importantly, ignore everything the governor's own Department of Revenue has published.

On April 30, the Department of Revenue released their 2007 Spring Forecast. In the entire report, there wasn't one single sentence that called for revisiting PPT. In fact throughout the report the DOR makes the case that PPT is working. State figures show capital investment has doubled, tax revenue has increased one billion dollars over the old ELF format and most all of the $150 million the state claimed to be shorted during the producers “true up” period in March for PPT has been reconciled.

In addition, throughout the report the Department of Revenue consistently makes the case for the current PPT system. “The PPT system is designed to encourage additional investment. If PPT is successful, cost will increase in the near term and production will increase shortly thereafter.”(Spring Forecast Pg. 16)

The report further states, “Accelerated spending relating to the development of new petroleum fields has also contributed to our increased cost estimates.” (Spring Forecast pg.15)

Isn't “accelerated spending” exactly what we need when production has dipped even faster than original projections?

Through late September, production has dropped to an average of less that 700,000 per day, while projections for this fiscal year by DOR were originally 764,000 per day.

In a joint opinion piece defending the governor's tax hike, DOR Commissioner Patrick Galvin and DNR Commissioner Tom Irwin wrote in the Anchorage Daily News on September 28, “In May, Governor Palin directed the Department of Revenue to review the performance of the current petroleum profits tax.” In May? Yes in May. Right after the indictments came down.

On April 30 the DOR released the Spring Forecast. The corruption indictments were handed down over the next week. It wasn’t until after the indictments that Palin saw an opening while building on cries from partisans who never approved of the original PPT. Even though her revenue department advocated no such proposal and there was no proof that any of the indictments had any impact on the final tax rate.

This is a signature populist Palin move.

And while some critics insist on saying Alaska needs its fair share, exactly how much is that?

On the Dan Fagan talk radio show this past week, call in guest Representative Les Gara, an Anchorage Democrat and vocal critic of the existing tax rate was asked how much is Alaska's fair share. Gara replied, “Something that gets their profit margins down to 20% or so.” Whoa, doesn't higher profits mean a number of really good things? More jobs, more investments, more community support? And doesn't the state's bottom line actually grow when the producer's bottom lines grow? Yes. 

Today with the new PPT in place we not only get a significant chunk when oil is high from the production tax and the additional  progressivity factor ($2.1 Billion) and royalties ($1.5 Billion), but when companies then cycle their revenue and costs to the bottom line, we get another crack at their profits from corporate income taxes that generated $600 million in revenue in fy07.

Today Alaska's economy needs stability more than anything else.

Pebble Mine is under tremendous public and political pressure. Shell Oil with an armada of ships and a $250 million investment at risk due to legal challenges. The recent Agrium closure in Kenai where the unemployment rate already runs a full 2% above the state average. And a gas pipeline strategy called A-GIA that should be called NO-GIA.

And the cost of government continues to rise.

Meanwhile the governor's solution is to raise the current production tax by 2.5% and implement an additional 10% tax on legacy fields. This ignores the fact that legacy infield drilling has done more to reduce the declining production rate than any other production approach.

To add insult to injury, the latest global rankings from Woods-MacKenzie rank Alaska 87^th out of the top 103 oil & gas markets as far as fiscal stability. (June 2007 Report, Executive Summary, Appendix: Fiscal Terms Index--pp. 18-19)

But yet Palin's approach is to raise taxes for the third time in three years.

In fact, the state takes four different types of taxes from oil companies. Property taxes, production taxes, royalties and corporate income taxes. Alaska's tax take is currently 61%, Palin's proposal would lift that to 68%.

The biggest economic risk and frustration is that for every politician encouraging higher ppt taxes, not one of them has ever offered a plan B if we tax the life out of new investment. Even Palin herself said she was dragged “kicking and screaming” away from a gross tax, even when her advisors warned her it would “fail to provide a reasonable balance between revenue and investment climate”, according to Commissioners Galvin and Irwin.

Why in the world would the governor need to be "dragged kicking and screaming" away from a tax proposal that would kill new investment?

For those keeping score at home, another command populist performance.

We often hear that oil taxes contribute .85 out of every dollar the state spends. An equally alarming statistic is the fact that every year oil tax revenues bring in ten times all other state taxes combined. As oil taxes rise and investment ebbs, these revenue pressures will be shifted to either individual Alaskans or the permanent fund.

Oil & gas developments don't happen over night. The average length of development for new fields is between five to seven years.

So if we're not attracting investment today, there will be no tax revenue tomorrow.

One of the interesting side notes in the interview with Senator Ted Stevens, was his complaint that the congressional delegation has had no communication from the Palin administration regarding the Natural Gas Pipeline. “There doesn’t seem to be a lot of information flowing to us on what the administration wants to do,” Stevens said. “We’ve not had one report of any kind that’s crossed my desk. That on a project this size is unheard of.”

I believe that confirms what most of us believe to be the story with AGIA and that is it won't work and there is nothing of substance to report. And if there was any doubt about the critical nature of securing financing for the projected $30 billion dollar project, the last thirty days of global credit market meltdowns with asset based lending has created a financial marketplace that will reinforce the theory; no producers, no pipeline.

The Palin admistration is taking unecessary risks with Alaska's economic future by continuing with this charade called AGIA and believing they can make this project happen without the producers.

So what should the governor do?

Governor Palin should still call a special session on October 18 but change the policy directive to stimulate development instead of smothering it. The governor's gas line team should propose a competitive tax rate on natural gas (the Commissioner of DOR testified during AGIA that the current rate was not competitive) as well as prepare amendments to AGIA that will allow the producers to bid.

Alaska's economy needs stronger leadership from Governor Palin.