Judge to State: "Taxes are Taxes"

by Dan Dickinson, CPA

Last week Alaska State Superior Judge Peter Michalski ruled that as a matter of law, “lost taxes” are not among the damages that the State can recover from BP as a consequence of leaking and shutdown North Slope pipelines in 2006.

I’m not an attorney. I haven’t read the briefing.  I’ve attended just enough of the oral argument to know that these are very complex issues. The State and BP appear to have excellent legal teams, and there will be many hours billed before these issues are finally resolved.

However, I have read the judge’s three page decision and it makes a point worthy of consideration in a wider context.   Oil taxes are imposed by the legislature on a “taxable event.”  If the taxable event doesn’t occur, there is no levy of tax.

That decision counters an unfortunate notion that seems to be gaining in popularity: namely that state oil taxes aren’t really like the “bad taxes” administered by the IRS – they are just the price at which we sell our oil.  The people of Alaska own the oil, this line of reasoning goes, and the constitution demands that Alaska’s natural resources be developed for the “maximum benefit of its people.” The highest oil prices – in the form of taxes -- maximize the benefit to the people.  Anything lower, and we are impermissibly moving benefits from the people to big oil.

Judge Michalski points out one of the major problems with this line of argument.  Taxes are not an agreed upon sales price the state has negotiated with a willing buyer; rather, he reminds us, the “State collects taxes in its role as a sovereign.”
 
We have chosen to tax oil production while allowing many other economic events in other industries to enjoy limited or no taxation.  We should be having a debate about tax policy and how much economic activity has grown or been stifled from low taxes in certain industries and high taxes in others.   This decision reminds us we shouldn’t pretend the debate is about negotiating a sale price for our oil.

 

Comments

[Gregg Erickson]

Dickinson says we're wrongheaded to think of state oil taxes as part of the return the state gets for the severance and removal of its oil.

He couldn't be more wrong. Consider the state's taxes on natural gas. As Larry Persily correctly notes in recent essay on this site, Alaska gas needs to be "priced competitively, which will require a reasonable state tax structure." Contrary to Dickinson, the need is for a reasonable state "take," including the take from taxes.

What would a reasonable state take look like?

A reasonable structure would make the state's take (royalty and taxes combined) highly progressive to production profits, with no floor on the combined royalty and tax take. That way the state shoulders some of the risk of low prices that would otherwise be carried wholly by the producers. ACES, though only covering the tax portion, is a good model.

We should, as Dickinson says, be having" a debate about tax policy and how much economic activity has grown or been stifled from low taxes in certain industries and high taxes in others." But the economic effects of taxes and royalties are largely identical. Taking Dickinson's legalistic approach to pretend otherwise is no way to facilitate this conversation.

Gregg Erickson