Overtaxing Is As Bad As Overfishing
by Andrew Jensen
Dating back to before statehood, Alaskans know that overfishing is a bad thing.
Stopping overfishing of salmon and regaining control of the resource was in fact one of the driving forces in the effort to become a state.
What we know about sustainability of our vast fisheries resources is worth applying to yet another debate over another immense asset — our oil — and the means by which that resource is taxed.
Get ready for more proclamations from Democrats, soft Republicans and the friends of Gov. Bill Walker about receiving “our fair share” of the resource through taxation and the debunked claims that the 2013 oil tax reform was a “giveaway” to industry.
The “Alaska model,” as it has come to be known, holds an overarching policy to prevent overfishing and though the enshrinement of sustained yield in the state constitution it has largely been a success.
The reason is simple: while there may be short-term economic benefits to harvesting nearly every fish in the sea, the long-term effect will be to destroy the resource. Some of the fish must be allowed to reproduce to sustain populations in perpetuity.
It isn’t a difficult concept to understand, but when it comes to the oil industry there is a large segment of the population and their politicians who don’t get it.
True, oil, unlike fish, is not a renewable resource. But capital is.
Certainly it is tempting to want to collect every dollar possible from the oil business through taxation, but doing so robs the companies of the investment capital they require to expand existing fields and to discover new ones. In the long run, overtaxing will wreck the economic engine of Alaska in the same way that overfishing decimated the salmon resource.
Our comment on adjacent opinion piece by Andrew Jensen
When your publisher first became engaged with the oil and gas industry in the 1970s, liberals used much of the same socialist code wording they do today.
For example, to incite populist approval for taking income from one sector to spend it on another constituency, one still hears the cries: “It’s our oil” … “It’s our gas” … “Give us our fair share” … “We should tax them more” ….
Back then and now, our varied response would be: “Shouldn’t Alaska become a place where ‘a deal is a deal’? The Alaska producers play by the rules; don’t change the rules after they make their investments! Change rules prospectively and investors will have a fair chance to reevaluate their future investment plans. If you don’t like an oil, gas, mining, timber, fish, motor fuel etc. tax structure change it, but don’t apply changes retroactively and don’t create any more discriminatory taxes. Tax for the reasonable needs of a prudent government, not for greed that produces an unsustainably large government.”
Back in the olden days some old wildcat oil driller once said, “Oil and gas might not be a REnewable resource, but it sure as heck is a NEWable resource.” The best example of the veracity of his statement is Prudhoe Bay itself. The Trans Alaska Pipeline System (TAPS) was financed on the basis of 9.6 billion barrels of proven reserves. Then, following the September 10, 1969 lease sale, the “ad-hoc liberal” leadership of Alaska’s legislature led a drive to increase oil taxes about a dozen times over the next dozen years.
On March 18, 1981, following intense political and legal acrimony between the state government and oil industry a somewhat uneasy, but effective, tax settlement occurred. It began with a unique, historical press conference featuring Governor Hammond along with the Democrat and Republican leadership of both the House and Senate. Participants acknowledged a revenue split of about a third of the production value going each to the federal government, state government and industry, with the “lowest” amount going to the state. While there was some grudging acknowledgement that perhaps the state should hold out for more, the general consensus was that a “fair share” had been generally obtained and that, for sure, it shouldn’t get less.
The key point of that historical event was that the state enjoyed a 20-year period of tax stability responsible in large part for the additional exploration and development leading to production since the great Prudhoe Bay discovery of not 9.6 billion barrels, but over 17 billion barrels.
The old timer was right. Oil and gas is “newable”. With the right policies in place, more work is done, new technology is implemented and confident investors risk exploration and development expenses that, more often than not, result in more proven reserves than were first identified. If they are treated fairly, NONrenewable resource investors will keep coming back producing unanticipated NEWable resource revenue and jobs.
In the adjacent editorial, Jenson refers to the Alaska Constitution’s mandate for “sustained yield management” of Alaska’s REnewable resources. He then goes on to apply the concept we explored above, to oil and gas tax policy. And, he makes the point that, beginning when Alaska repealed an anti-investment law (SB21), all kinds of new exploration and development has flourished.
Three more points:
- We talked above about a “20-year period of tax stability”. That ended when after the 20-year hiatus Governor Frank Murkowski changed the easily calculated 15% severance tax into a progressive production tax in return for the government providing the industry with tax stability. But the legislature double crossed both Murkowski and the agreeable producers, accepting the tax increase but denying producers the tax stability that could lead to investment in a Prudhoe Bay gas monetization project. Adding insult to injury, Governor Sarah Palin increased the Production Tax (i.e. Called “ACES”), with legislative acquiescence, and doubled down even on that by applying it retroactively. That lead to the dearth of new investment lasting until the repeal of ACES.
- Alaska is an oil state! Regardless of what today’s political socialists say, oil is now and will remain the economic mainstay of Alaska, if allowed to do so. No other industry can provide such massive volumes of revenue — and support industry jobs — if a secure investment climate is cultivated. All subsidies for alternate energy projects leech money from the productive sector and increase the cost of government services. We support development of alternate energy sources through fair competition not via government subsidy programs that encourage uneconomic projects by taking taxes from economic enterprises.
- A half dozen years ago Alaska created a tax credit incentive program for small explorers to encourage new discoveries. That program has produced new discoveries but it will be years before all of those can be transformed into operational, profitable projects. Meanwhile, Alaska has delayed payment of the owed, tax credits, further diminishing the State’s reputation as an safe investment oasis.
While this commentary began with tax and investment principles, we conclude with spending and budget observations:
- Alaska has run headlong into a fiscal crisis that credit rating agencies have reflected in creditworthiness downgrades and warnings. This is because Alaska’s voters and elected leaders have avoided economic warnings for over three decades that it had created too large a government to be sustained by its nearly 90% dependence on volatile oil prices. The state’s governor continues to spend a nearly depleted treasury on a) sustaining government jobs and the operating cost of government and, b) a not-currently-economic LNG project with useless marketing offices in Tokyo and Houston, and a massive government run and subsidized gas distribution project in Fairbanks.
- Alaska Headlamp reports on the current status of Alaska’s budget crisis: Mission Critical is a new, joint project of the Alaska Policy Forum and United for Liberty. “Helping to create the government we can afford…” is their tag line.The group has put together an impressive body of work. Mission Critical has looked at all 18 State department budgets, matched up programs and services with mission statements and identified, for each department, what is “mission critical” along with what isn’t.Click here to see the results of their work. Spoiler alert: There is room to reduce the size and scope of government – a lot of room.Why is this type of activity necessary?
- The legislature hasn’t done it.
- Department Commissioners refuse to do it. (Click here to read the legislative intent report where Commissioners refused to provide a report to the legislature identifying services that could be privatized).
- Meanwhile the Governor is asking to INCREASE the current budget by $110 million.
- Our friends at the Fraser Institute in Canada make this observation about Alberta’s budget, also oil dependent but not nearly to the degree Alaska is, which demonstrates that more prudent fiscal planning is a trait that any commodity-dependent government should adopt:
Spending is to blame for Alberta’s $10.8 billion deficit
The Alberta government could have posted a small budget surplus this year if successive governments had kept program spending increases in line with population growth and inflation, finds Alberta’s Budget Deficit: Why Spending Is To Blame, 2017.
Assuming Alaska can overcome its currently debilitating taxation and budgetary challenges, it must still contend with the long term. That is, how can its economy be sustainable not just for the next few years, but for the very long term. Senator Mike Dunleavy and his colleagues in the Alaska legislature are promoting an improvement in the state’s relatively ineffective Constitutional Spending Limitation. We provided some history and background on that activity this week and wish the more dedicated Members of the Legislature Godspeed on that badly needed step toward prudent budgeting and a durable fiscal system.
We hope that, not only Alaska, but the citizens of Alberta and other commodity dependent areas will consider the value of long term stability via creation of Constitutional spending limits.