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Economist Support of Tax Regime

In the fall of 2012, the Alaska Department of Revenue predicted oil revenue to be $7.2 billion dollars in 2014. However, in December of 2013, just months after passing S-B 21, the state revised the prediction to just $5.1 billion dollars. Opponents of S-B 21 say the bill gave away the two billion dollars to the oil industry. Professor emeritus at the Institute of Social and Economic Research Scott Goldsmith says the study he conducted showed that was not true.

“Only about four percent, 90 million of the forecast revision, was due to a switch to SB 21 and 96 percent was due to other factors. Most of the downward revision results from the updated price, cost and production assumptions, dropped estimates not only from the production tax but also from royalties and production tax. 300 million of the drop was also to cover the one time payout to the expiring ACES tax credits.”

ACES, or Alaska’s Clean and Equitable Share act, was the oil tax regime the Alaska Legislature enacted in 2007. It was replaced last year by the new regime included in Senate Bill 21. Goldsmith’s analysis of the 2 tax systems shows that at current oil prices, S-B 21, generates more revenue. However, if the price of oil rises then ACES tax would generate more revenue.

Goldsmith says S.B. 21 is the preferred plan for the oil industry even though they will have to pay more in taxes.

“Producers are not in business to minimize taxes. They are in business to maximize profit. And what’s the best way to maximize profit? The best way is to expand, increase the size of their operation.”

An easy way to look at it, Goldsmith says, is if all the people in a household are working, the household taxes go up but so does the income.

“With more tax revenue a federal treasury is better off too. It’s the difference between a pie that’s of a fixed size and a pie that can expand.”

In 1980, the average well in the North Slope was producing 3500 barrels per day. Today, the average North Slope well produces 250 barrels per day. Goldsmith says the cost of oil production spread over so few barrels is the reason incentives for oil companies are so important.