Lest We Forget: On March 18, 1981 Alaska Created Two Decades Of Investment/Tax/Economic/Social Stability
(Video: Governor Jay Hammond and Legislature Define ‘Fair Share’ Of Petroleum Revenue 3-18-81 from Dave Harbour archives on Vimeo.)
TRANS ALASKA PIPELINE SYSTEM (TAPS)
Four decades ago yesterday, Alaska created what was to be two decades of “quasi”-fiscal stability. We say, “quasi” because even in the wake of “reform”, politicians would continuously be seeking “more revenue”.
But let us begin the story this way. 1980-81 was an era when the Trans Alaska Pipeline System (TAPS) was transporting over 2 million barrels per day of Prudhoe Bay crude oil to the West Coast. Alaska’s economy was breaking records and lawmakers almost couldn’t spend money fast enough.
The 70s decade had seen politicians raise oil taxes almost annually. The biggest predatory tax attack occurred in 1979 with the passage of a discriminatory (i.e. “separate accounting”) oil and gas corporate income tax. Until then, oil companies had been subject to a general, corporate income tax. Even with the state’s huge wealth, there were signs of, “trouble in River City”.
A great “Alaska lands” debate would result in the passage of the Alaska National Interest Lands Conservation Act (ANILCA) that transformed the Arctic National Wildlife “Range” into a “Refuge”, among other things.
The oil companies had sued the state over its discriminatory tax attack. Citizens were concerned about reliance on oil for over 90% of their government’s operating budget. Politicians were frightened that their overreaching, oil tax efforts could produce a losing court case and a court order to return to producers billions of dollars in refunds, and perhaps penalties. Fairbanks Libertarian Dick Randolph’s calls for a personal income tax repeal — together with a massive, Anchorage-based grassroots campaign led by People Against State Income Tax (PASIT), Common Sense for Alaska, Resource Development Council for Alaska, the new Alaska Support Industry Alliance — and other community and business organizations — also provided political incentives for the tax reform. Politicians of the day told your publisher (i.e. then ARCO’s Government Affairs Director) that they received more citizen mail on this tax reform package than on any other issue in the young state’s history.
Therefore, political pressure and fear — along with a more noble desire to achieve fiscal stability in Alaska by some legislators — provided an incentive for the press conference announcing a grand bargain (i.e. viewed above, and HERE). The bargain found both the personal income tax — and oil and gas corporate income tax — repealed. Those repeals, together with an agreed-upon increase in the oil severance tax and withdrawal of the industry lawsuit thus produced a “fair share” of oil revenue to the state and elimination of an unnecessary personal income tax on constituents.
Governor Jay Hammond and Dave Harbour discuss (Circa. 1990) the creation of the American Bald Eagle Research Institute at the University of Alaska (Southeast) campus.
For those who hunger for the ‘good old days’, listen to our own live recording of this unique press conference from that historical day (Above). On March 18, 1981, Governor Jay Hammond and virtually all of the House and Senate Republican and Democrat leadership gathered together to announce they had arrived at an equitable split of Prudhoe Bay wealth among 1) the Industry, 2) State government and 3) Federal government interests (i.e. though some were a little cautious, a little less than enthusiastic as you will hear). Scroll up to listen or click here.”
The decade of the 80s and then the 90s did produce more and more fiscal sour notes along with the calming income tax repeals.
Yes, Common Sense for Alaska (Reference 1 & 2), organized leadership forums bringing public attention to the dangers of imprudent fiscal policies.
But deregulation of natural gas by the federal government resulted in a rising supply and lower prices, thus rendering infeasible a planned AlCan Highway gas pipeline project designed to transport the North Slope gas. A “Maple Leaf” gas pipeline from the nearby Mackenzie Delta area, likewise faltered, as did other ideas, like the “All Alaskan” Yukon Pacific project.
Rumblings of new oil taxes — including gas reserves taxes and TAPS haul road taxes — occasionally surfaced and contributed to uncertainty, but none represented a serious erosion of Alaska’s new investment climate stability, even as the price of a barrel of oil flirted with single digits. After all, Prudhoe Bay production was at its zenith. As the field continued to mature, the state recalculated a change in policy slightly affecting an economic limit factor (i.e. “ELF”) in calculating oil severance taxes, resulting in an expected shifting of some revenue from producers to the state. But the investment climate would recover with recovering prices in the next decade.
Dr. Scott Goldsmith, University of Alaska – Anchorage Institute of Social and Economic Research (ISER). Goldsmith has been the major author of studies and recommendations for Alaska’s economic stability over the years. NGP stock photo by Dave Harbour
During the 90s the University of Alaska’s Institute of Social and Economic Research began to warn policymakers to become less dependent on oil revenue to fund Alaska’s operating budget due to both price volatility and diminishing production. Economist Scott Goldsmith referred to urgently required tax and spend reform policies as a “safe landing”, a gentle way — if begun early enough — to create a sustainable fiscal regime for the 49th state’s future generations. Common Sense for Alaska successfully championed the passage of a Constitutional limitation on government spending but by the time it weathered the juggernaut of legislative changes, it would end up doing exempting specific spending categories and did little to constrain the growth of Alaska’s huge, constantly expanding and unsustainable government superstructure.
As prices began to recover in the 90s both republican and democrat policymakers found it impossible to exercise the restraint necessary to achieve ISER’s wise counsel to create a “soft landing” for fiscal policy. By the early to mid-2000s, politicians were replacing then increasing the easily calculated 15% severance tax with a complex and progressive production (i.e. severance) tax. It was a stake in the heart of Alaska’s energy investment climate for a decade until it was reformed.
Here is an Alaska Department of Revenue “Historical Overview” of production taxes for readers’ reference.
The first decade of the new Millennium was fraught with oil and gas tax instability, lower production and operating budgets subsidized with diminishing savings — as Common Sense for Alaska and Goldsmith had repeatedly warned over the previous two decades.
Governor Bill Walker. Northern Gas Pipelines photo by Dave Harbour
In the first and second millennial decades, policymakers under pressure slightly improved investor confidence with production tax reform which did create an opening for more exploration and development with mixed results. On the one hand, ConocoPhillips continued hard-won but successful development in the National Petroleum Reserve – Alaska. That effort — along with other ANS efficiencies including extended reach lateral drilling — began to significantly improve the throughput of TAPS. On the other hand, Alaska’s government failed to provide some producers with expected tax credit payments in a timely way. Adding fuel to the fire of public controversy, former governor Bill Walker sought to use a portion of Annual Permanent Fund Dividends to residents to subsidize the operating budget, while spending hundreds of millions in efforts to socialize Alaska’s infeasible natural gas transportation project and to vastly expand Medicaid benefits in the state.
Alaska’s poorly-conceived Constitutional Amendment authorizing citizen initiatives continued to threaten investors with the dark cloud of unknown, future tax initiatives.
…which brings us to today.
Alaska Governor Mike Dunleavy. Northern Gas Pipelines photo by Dave Harbour
Governor Michael Dunleavy hopes to create a new era of fiscal stability and budget sustainability. Among other remedies, he has proposed Constitutional tax and spending reforms and Permanent Fund Dividend (i.e. PFD) reform. To achieve fiscal certainty, the first two are essential but have armies of political enemies. The latter PFD issue has large support but does not create overall fiscal certainty. These three badly needed Constitutional reform issues are all needed to provide future generations of citizens and corporate investors with political and fiscal certainty. But we fear that — unless the three reforms are all linked with some durable, constitutionally legal strategy — the first two will fail and the latter will succeed leaving the state sinking one year deeper into fiscal quicksand.
We hope we are wrong and urge our Alaska readers to redouble efforts to support the Governor’s efforts to once again signal to the world that, “Alaska is open for business” by adopting Constitutional reforms.
EndNote: One recalls that two decades of fiscal certainty and investor confidence began in 1981 with non-severable legislation combining Personal Income Tax Repeal with Oil & Gas Corporate Income Tax repeal & a Severance Tax increase from 12 1/4% to 15%. It was a grand bargain that didn’t make everyone ecstatic but did produce a workable compromise: two decades of relative, fiscal peace. Today’s challenge is more daunting. Even with productive new ANS discoveries, TAPS throughput is static and down from its highest capacity by 3/4. Energy prices are stuck midway between recent lows and highs. Finally, achieving durable taxing/spending/PFD Dividend reforms require Constitutional amendments while the temporal 1981 tax reforms were more easily achieved with statutory changes.
Even facing such a daunting challenge we have hope, for while Alaska’s own elected leaders created the fiscal Gordian knot vexing their constituents, we also know that what man has done can be redone if not undone, however painful the redoing might be.
Yes, “We cry for thee, Alaska, though we will eternally hope well for thee.”