68%. That’s a big number. If Governor Palin has her way, 68% of the value of every barrel of oil produced in Alaska will go to government.
As we head into this special session on oil taxes, it’s extremely important we keep this number in mind.
Imagine, your paycheck comes in, and 68% is taken to be spent by government. According to MSN Money, individual Alaskans are taxed at a rate of 27.9% on average as a percentage of income, including all federal, state, and local taxes. An increase to 68% would cause a reaction similar to that of the colonists with their tea. Their motto of taxation without representation was one that resonated well with the people.
Today, resource development companies pay the bulk of Alaska’s taxes. Absent a fiscal plan that includes a mechanism for individuals to pay their “fair share,” Alaskans are left with a system of representation without taxation. Alaskans vote our elected officials into office with the hope that we won’t be taxed and our Permanent Fund won’t be touched. Sounds great to the average Alaskan, but for businesses contemplating investing in Alaska, it’s a scary message.
Alaska is currently the highest taxed oil and gas region in North America. We have three types of taxes that oil companies pay in addition to a royalty. I think it’s important we differentiate between them.
What is a tax?
According to dictionary.com, a tax is: (1.) a sum of money demanded by a government for its support or for specific facilities or services, levied upon incomes, property, sales, etc. (2.) a burdensome charge, obligation, duty, or demand.
In Alaska, we have several types of taxes that are assessed on the oil industry. These include the severance tax (PPT), corporate income tax, and state and local property taxes. Last year, the PPT was set at a base rate of 22.5% which rises (up to 47.5%) as oil prices rise. Governor Palin has proposed to raise this base rate to 25% under her bill (up to 50% as oil prices rise). The corporate income tax and property taxes will not change under this bill, but their impacts to the state are no less important. Indeed, raising the PPT could result in less investment, leading to less infrastructure development, and ultimately lower property tax revenue for the North Slope Borough, Valdez, and other communities throughout the state. Guess what happens nextthey will rely more on the state to provide services that are today offset by local property taxes.
What is a royalty?
Again, according to dictionary.com, a royalty is a compensation or portion of the proceeds paid to the owner of a right, as a patent or oil or mineral right, for the use of it.
In Alaska, royalties are determined by the terms of the individual lease contracts, which are signed prior to extensive exploration, development, and risky investment. Basically, a leaseholder commits to give the state a share of anything it finds and produces on the land. This amount in Alaska is usually 1/8th (12.5%) or 1/6th (16.67%) and cannot be changed unless both sides agree.
In sum, between taxes and royalty, today this amounts to nearly 63% of every barrel of oil. So, at $60/barrel, that would mean approximately $37.80 goes to one form of government or another through both the aforementioned taxes and royalties.
So what’s left is profit, right? Wrong. That $22.20 is used to run daytoday operations, employ Alaskans, buy supplies from contractors, etc. What’s remains is profit.
Has profit become a dirty word?
There’s nothing wrong with profit. In fact, look at the top 50 holdings of our very own Permanent Fund Corporation (http://www.apfc.org/investments/top50.cfm). You’ll see a pattern of companies that have done well with their investors’ money. Indeed, as of June 30, 2007, the $40 billion fund has a few interesting facts I’d like to point out.
Do you know what company is the second largest stock holding of the Alaska Permanent Fund? Most of you will be surprised to discover it’s ExxonMobil.
So, how is it doing? Not bad. In fact, of the top 50 stocks held by the fund, it’s fifth in total return with a market value of 223% greater than what was invested. This return on investment for the state was bettered only by four companies: Total (269%), ConocoPhillips (264%), Apple (256%), and Altria (235%). Interestingly, three of the top five returns are from oil companies, (Chevron is 8th (199%) BP is 17th (161%) for those of you playing at home).
These oil companies are not only providing a return on investment to each of us through our permanent fund dividends, they’re also providing goodpaying jobs for Alaskans. I don’t see Apple making iPods or Altria rolling cigarettes here. What investment are they making in Alaska? Among us, who do they employ?
During the AGIA discussions, Governor Palin stated in one of her weekly gasline briefings, “Remember, it is government’s role to provide INCENTIVES for the private sector to build projects. . . We are doing our best to incent the private sector.” Unfortunately, changing tax policy year after year does not incent. In fact, it likely does the opposite, steering critical investment dollars away from Alaska. If the tax rates rise yet again, these companies likely will, metaphorically speaking, throw their tea into the harbor by investing elsewhere.