Alaskanomics

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.

 

Video Clip: How does shale gas impact the viability of the Alaska natural gas pipeline?

At Northrim's Economic Update Luncheon, an audience member asked Keynote Speaker Dan Dickinson, "Do the shale gas reserves in the lower 48 affect the viability of the Alaska natural gas pipeline?" Hear Dan's answer in the clip below.

If we don’t need a gas pipeline, we just might get one

by Dan E. Dickinson, CPA

Is a gas pipeline economic? First if investors think that commodity prices in the future won’t cover the tariff – and at today’s prices and estimated tariffs they certainly won’t – there will be no gas line.

Moreover, if investors suspect that the State has no other new sources of revenue they will be equally reluctant to invest in a gas line. Unknown future taxes on a potential gasline can be as troubling as low forecasted natural gas prices in making a project uneconomic.

A “contract” or legislative offer of fiscal stability which fixes taxes for some period have proven to be hard sells in this state politically.  And even if we could all come to an agreement, it may not be enough. In 2008, as energy prices climbed Dr. David Wood noted that  “…even in circumstances where fiscal stability is offered by contractual clause…or by legislation…it is possible for such clauses to be circumvented by governments willing to exploit increased power provided to them by changing market conditions.”

We can’t control natural gas prices. However we can create a state fiscal system that is viable even without a gas line. Obviously, we will need such a plan if there is no gasline project.  And we will need a plan to cover the State’s needs if a gasline project is built but turns out not to be the cash cow that has been officially forecast.  So if we generate a plan soon it might enable a gasline project by allowing the State to negotiate from a rational, not desperate, position for investment.

A reasonable fiscal plan might include slowing the growth of general fund spending, use of earnings from the Permanent Fund and other State investments, broad based taxes such as a personal income tax, sales tax or gross receipt tax or wider business income taxes. This type of balanced fiscal plan could help us convince ourselves, and others, that we don’t see a gas pipeline as the only place to turn for State needs.  And that could go a long way towards making our gasline dream an economic possibility.