Home Politics John Aronno: On Politics Packed House Hears Lengthy Debate on Oil Tax Referendum

Packed House Hears Lengthy Debate on Oil Tax Referendum

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[Watch the full event at the bottom of the page]

I had a political science professor in college that offered a blunt reality about democracy. He told his political philosophy class to always remember that experts don’t decide elections. “Think of democracy as the result of voting on your worst day,” he said.

Political campaigns are often run, understood, and voted on, through thirty second television and radio advertisements. The average person doesn’t vote. The average voter doesn’t have a firm grasp on what he or she is voting on.

So, how confident should we feel knowing that Alaskans are about to vote on an incredibly complex oil tax referendum which could very much determine the future of state solvency? How much would you wager the average voter knows about an issue that warranted a 47-page informational packet just to explain the gist of? Something uncommon this summer, as voters prepare to weigh in on the SB21 referendum, is the severity of the issue; the gravity of the choice we will collectively make. But that sense doesn’t seem to have alleviated a whole lot of the confusion.

Last Wednesday, Alaska Common Ground hosted an informational, two hour forum dedicated solely to the single issue, deep within the weeds of wonk. Invited to defend the repeal effort were Alaska State Senator Bill Wielechowski (D-Anchorage) and Gregg Erickson, an economist, consultant, and editor-at-large of the Alaska Budget Report. Opposing repeal were Brad Keithley, president of Keithley Consulting, an oil and gas policy consulting company, and Roger Marks, a petroleum economist specializing in petroleum economics and taxation. Marks also served in the Alaska Department of Revenue and as a legislative consultant.

On a beautiful summer day in Alaska, the event sold out. Actually, it beyond sold out. I showed up a half hour early and barely made it in the door. I watched former GOP Chair Randy Reudrich get tossed three times for trying to sneak back in after the maximum occupancy had been stretched far beyond leniency. A topic as inherently unsexy as oil taxation drew a crowd atypical of any live event that didn’t feature a national headliner. People are confused, unsure, uneasy, and, yes, angry.

 

Feeding Populist Rage.

Wielechowski rooted his side’s case in what he purported to be a dishonest campaign waged by their opponents, whom both he and Erickson relentlessly framed as serving the interests of the oil industry, not the citizens of Alaska. Specifically, he referenced the advertisements, which have dominated television sets and car stereos by staggering numbers. Erickson estimated that the effort to kill the repeal of Senate Bill 21 broke down to about $100 per voter. The perception that Big Oil was trying to buy the election was an oft repeated refrain, and Wielechowski tied it into his defense of the state’s previous oil tax regime, Alaska’s Clear and Equitable Shares Act (ACES):

You’ve all heard the millions of dollars of TV and radio ads saying nobody wanted to invest under ACES. False. Investment by oil companies skyrocketed. 70 percent of all time prices. You’ve heard the oil ads about how jobs left Alaska. False. All time highs in jobs under ACES. Every single year. Although the oil companies were hiring 50 percent of the people from outside of Alaska. You heard the oil company ads about companies fleeing Alaska. False. The number of companies filing tax returns in Alaska increased 383 percent under ACES. You heard that Alaska wasn’t profitable. False. The oil industry made over $40 billion in profits under ACES. If you put your money in the bank, you’re lucky if you get a 1 percent rate of return. The rate of return under ACES on the North Slope, according to the Parnell experts, over 55 percent. The rate of return at Prudhoe Bay? 123 percent. Compare that to Norway: 15 percent. Canada: 15 percent. Oh, North Dakota: 25 percent.

The way the state taxes oil production under ACES differs dramatically from the plan established with SB21, the Make Alaska Productive Act (MAPA). Under ACES, taxes rise in coordination with the price of oil. This can be as low a rate as 25 percent, and as high as 75 percent — meaning that the higher the price per barrel of oil, the higher the state’s cut.

“If oil prices rise from $120 a barrel to $140 a barrel, the oil companies didn’t do anything to deserve that windfall. It’s a windfall,” Erickson explained. “And under ACES, Alaska gets a very big chunk of that: 75 percent. And it should get 90 percent. But under the More Alaska Production Act that’s not what happens.”

MAPA, alternatively, offers a fixed base rate of 35 percent, irrespective of oil prices (though effective tax rates could run well below that mark). The only way that MAPA can offset the losses in revenue to the state is if it increases production by the tune, according to Keithley, of five percent. He says that an increase of that size will only be possible through the more competitive tax rate offered by MAPA.

“If SB21 was going to bring us new investment which was going to lead to more production that was going to lead to more revenue for the state, I wouldn’t be sitting here today,” Wielechowski responded. “The problem that we have is every shred of evidence proves otherwise.”

Wielechowski cited comments made by BP’s vice president of reservoir development in Alaska, Dave Lachance, who told the Resource Development Council this past November that “we can’t stop the decline,” and highlighted ConocoPhillips’ website, which he said touted increased production worldwide, but not in Alaska.

 

Alaska’s “Robin Hood” Oil Tax.

Keithley said that the reason why decline is plummeting, especially by the Big Three oil producers, is because of the massive incentives (tax credits) intended to spur competition among smaller oil companies.

Under ACES, we gave incentives to the tune of something like $400 million dollars… to producers to go explore in areas that we didn’t know there was oil. At the same time, where we knew there was oil, we were charging producers for projects inside those areas at higher rates. [W]ithin Prudhoe, there are a number of fields. The big Prudhoe field has been producing, but there are a number of other fields that haven’t been producing and haven’t been developed over time. So why are we giving incentives to go explore areas where we weren’t sure there was oil and charging higher rates in areas where we did know there was oil but the economic setting hadn’t yet justified going after those smaller fields?

Keithley defined ACES as a “Robin Hood tax system [where] we take from the rich and we give to the poor.” The problem, he said, was that the system of redistribution wasted money on companies hoping to strike gold on unknown fields. He said that this disincentivized larger companies from increased production on the legacy fields in Prudhoe.

Wielechowski defended the subsidies. He said that, by 2006, the Big Three oil companies — BP, ConocoPhillips, and Exxon — had what amounted to a monopoly on the North Slope, pointing out that a big tax break for major producers in Prudhoe didn’t seem warranted when the rate of return on investment was 123 percent. “We wanted to encourage smaller companies to come in,” he said. “And guess what? It worked. The number of companies filing tax returns increased 383 percent.”

Regardless, Keithley said, the incentives provided to encourage competition were untenable given the state’s fiscal situation. “Alaska is shooting itself in its own foot,” he said flatly, shaking his head throughout Wielechowski’s remarks. Keithley noted that the legislature had passed the largest two budgets in state history, back to back, in the past two years, draining $6 billion from savings. He said that the $400 million coming out of the operating budget couldn’t be reconciled with a sustainable budget, which he estimated should be $5.5 billion. Meanwhile, the existing fields with known oil are “just sitting there.”

Erickson said that cutting the annual budget to $5.5 billion (cutting spending by 35 percent) in one fell swoop was tantamount to staving off a future fiscal crisis by having it right now.

 

Don’t Depend on the Legislature.

A questioned from the audience asked panelists if the process that saw SB21 passed through the legislature was transparent enough. A split in the state senate was tipped with the votes of senators Peter Micciche (R-Soldotna) and Kevin Meyer (R-Anchorage) — both employees of ConocoPhillips. Micciche is the manager of Conoco’s Kenai LNG Facility; Meyer serves as Facilities Support Coordinator. SB21 cleared the senate by a 11-9 vote.

Wielechowski offered a shrug before responding:

What can I say? The first committee of referral in the senate was chaired by an executive at ConocoPhillips. The second committee of referral in the senate was chaired by someone who’s husband has worked for the oil industry. The third committee was chaired by someone who works at ConocoPhillips. In the house, it was heard by an employee who works with ConocoPhillips…. I don’t mean to besmirch anyone, the conflict rules need to be changed. If you work for an employer who stands to make billions of dollars you shouldn’t be voting on the bill. You just shouldn’t.

Wielechowski added that he had offered a bill last session as an alternative to SB21. “Unfortunately, I can’t get the Republicans to hear it.”

“As much as Bill wants his bill to be heard, there’s a reason the bill hasn’t been heard. That’s because the legislature we have, and the legislature we’re going to have after this election, isn’t going to hear the bill,” Keithley answered back. “They just aren’t going to hear the bill. They’re not going to make those decisions.”

Keithley’s cynicism regarding the legislature’s proclivity to risk another round of oil tax legislation is legit — especially given how long the prolonged efforts resulting in ACES and SB21 took, and the partisan divide in how they decide which bills get priority. But how then does he then have confidence that the same legislature — that he frequently noted passed the two largest budgets in history — will somehow choose to cut spending by 35 percent to bring spending in line with his idea of economic sustainability?

 

Post-Forum Gripes Miss the Mark.

The major gripe that reverberated from last week’s oil tax forum was that the “Yes on 1” crowd resorted to cheap, sound bite politics. Amanda Coyne quipped that the arguments offered by Keithley and Marks “didn’t lend themselves to one liners about getting ripped off by oil companies, and it being our oil.” On Facebook, Alaska Dispatch News editorial writer Mike Dingman took umbrage: “It’s so much easier to scream ‘IT’S OUR OIL’ than it is to try and explain economic realities to a crowd that’s booing you and hurling insults.”

The last example prompted Cean Stevens, Libertarian candidate for state house, to respond: “How did you like the Vote Yes chick holding the door making pirate noises? I wanted to shove my hook in her skull.”

Charming.

But this wasn’t a contest between substance and fluff. And the phrase “It’s Our Oil” was stated all of six times throughout the entire two hour forum — twice by Keithley. Or, roughly, once every 20 minutes. About the same time one would be subjected to “No on 1” commercials during prime time television. And anytime you have a crowd full of Alaskans, especially with conflicting views, people act less than cordially. It happens at forums, it happens at stand up comic shows, it happens on facebook pages after the fact. We often suck at crowds.

Keithley and Marks came in the door with easily exploitable baggage — they have worked on behalf of oil companies. Erickson was quick to link them to that past every chance he got, to foster distrust from the audience. Whether that crosses a line of fairness is subjective, but given the underlying premise that many feel as though SB21 was passed under similar auspices in the legislature — and given that the television and radio commercials repeat ad nauseum with the hard-to-forget disclosure: “Top contributors are BP, Anchorage, Alaska, ConocoPhillips, Anchorage, Alaska, and ExxonMobil, Anchorage, Alaska” — it would by politically daft not to make the connection. Politics is just as much about calculation as it is about principle.

Both sides came armed with important points, voluminous data, and differing opinions about how Alaska gets anywhere that isn’t economic ruin. For Wielechowski and Erickson, the short term losses in revenue caused by SB21 — a dispute challenged by no one at the forum — are likely more disastrous and long lasting than returning to ACES, tinkering with high end progressivity rates or attempting to enforce lease agreements, and hoping things get better. Marks and Keithley are optimistic that the incentives put in place by the 35 percent flat tax rate to oil companies will increase investment enough to straighten the current downward decline in production.

Neither side had any conclusive evidence clearly making the case that either proposal would do the trick. Quite the opposite. Both pairs conceded that taxation was one facet of a larger discussion on diversifying revenue, reducing spending, and a number of other external factors which have little to do with the SB21 referendum. Voters will have to do their best with the information available.

But don’t pay too much mind to anyone telling you how to vote in thirty seconds or less.