Local economist calls ‘$2 billion giveaway’ a myth

The phrase, “$2 billion giveaway” that was coined by those who want to repeal oil tax reform, has been used so often, including by this writer, that for many it’s believed to be a fact. Often quoted, and much respected UAA economist Scott Goldsmith took a hard look at the number and came up with something very different in a report funded by Northrim Bank, which is against repeal but funds a wide variety of reports about all facets of the state’s economy.

The “$2 billion giveaway is a myth,” Goldsmith told a crowd of about 200 at the Resource Development Council meeting on Thursday morning

While it’s true that the state is running at about a $2 billion deficit, the oil tax break isn’t what’s driving most of it, he said.

For one, to the extent that there’s a “giveaway” at all, it’s closer to $90 million. Much of the rest of the money is a result of lower production, lower prices, and rapidly increasing costs to produce the oil, costs that the oil companies provide to the state, and which we need more information about, he said.

Secondly, in the long run, reform will stabilize the tax system. At some prices the amount of taxes the producers will pay will be more under the new tax regime than under ACES. At some price points, it will be less. Why do the companies like it so much that they are willing to spend tens of millions to make sure that it’s not repealed? Because they believe that it will increase production

“The producers are not in business to minimize taxes,” Goldsmith said, “They’re in the business to maximize profit.” And the best way to do that is to expand and to increase the size of their operations, he said. He likened it to his wife getting a job. The family’s tax bill will go up, but the household will have more income. “We’ll be better off. And the treasury will be better off as well.”

Read Goldsmith’s presentation here.

Vic Fischer, who is the head the effort to repeal SB 21, issued a press release following the presentation. He’s sticking to his guns. “Goldsmith misses the mark,” he said and pointed to the $2 billion deficit has his proof.

“What Alaska needs is a tax structure that increases exploration for new oil and gas, not just provide incentives to pump the oil they are contractually obligated to produce,” he wrote.

Contact Amanda Coyne at amandamcoyne@yahoo.com

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15 thoughts on “Local economist calls ‘$2 billion giveaway’ a myth

  1. Shattered

    Well, if it provides more uncertainty, I can understand the attraction. And if the oil companies like it, it must be good.

    It seems like a great idea now that you put it that way. I sure hope the oil companies don’t leave and make us deal with all of this troublesome oil by ourselves. I’m really glad to have them around.

    So, do you think that Exxon Mobile, BP and Conoco Phillips will pack their bags and leave the slope if SB21 is repealed?

  2. Jon K

    Good question. Seems like they want to make as much money as possible. But they couldn’t get their boards to invest in Alaska under ACES because the punitive tax rates made it unappealing even though the state was heavily subsidizing capital projects.

    Whatever the reason SB 21 is working. They are investing tons to develop oil within the legacy fields and lots of new companies are coming to explore and develop.

  3. Derp

    The ‘balancing revenue at high and low prices’ is a selling point of SB21 to Alaskans, not the oil companies. That ‘oil companies feel more secure with it’ is another selling point to Alaskans, but it seems like all things equal, they’d prefer to be the ones with less take at high prices, but more take at low prices. The only way they’d prefer the opposite is if they expected more revenue overall. Which is the case, I believe. So here’s the one simple question: Are you really saying that oil companies aren’t projecting significantly higher profits per barrel under SB21 than under ACES, over the next 5 years? And if not, why would they then prefer a structure that gives them LESS money in times of low oil prices? Seems, as I said, that they’d prefer a bigger share in times of scarcity (as would anybody)

  4. Jon K

    The #1 problem with ACES is that it took way too much profit at high oil prices or when profits are high. SB 21 fixed that problem. The oil companies are therefore happy. But that does not mean that SB 21 reduced taxes across the board. The Administration’s pitch was that if the oil companies were getting more of the upside, then the law should change to protect the state at lower prices / lower profits. The Administration also traded credits – it gave the companies credits for production of new oil but took away the 20 percent capital credit under ACES, which essentially gave the companies 20 cents on every dollar that they spent. The media has NEVER accurately described the trade off.

    In short, the Administration’s view was never as simple as “lower taxes” are always better. Instead, they wanted to fix the law to encourage more investment, more wells, and more production so that the state will ultimately receive more revenue than under ACES, which resulted in few wells being drilled, few new companies coming to the state, and a rapid decline in TAPS throughput.

  5. WC

    “Why do the companies like it so much that they are willing to spend tens of millions to make sure that it’s not repealed? Because they believe that it will increase production”

    Tax changes don’t increase production, oil companies do, in response to profit incentives. The argument for tax reform under ACES was that taxes are too high, and tax reform would increase profits, leading to increased production. I disagree that SB21 should be kept, but I understand the logic behind it. What I don’t understand is why the Rs think it’s a good argument to make that “SB21 actually doesn’t reduce taxes” during this limited window where the tax rates of ACES and SB21 are relatively even. IF SB21 doesn’t reduce taxes, it shouldn’t incentivize much new production, under the logic of the anti-ACES crowd. If it does, which I think both sides suspect over the long run, why bother saying otherwise? Republicans should own up to their position that lower taxes is better.

  6. Jon K

    One that is not correct – they are paying a bit less in taxes not more. Two the oil companies want more of the upside which is what SB 21 gives them by eliminating progressivity – ie the windfall profits tax. In return the state took away the 20 percent tax credit and will get more revenue at lower prices. It was a trade. The media and the dems have never accurately reported what this bill does. It is far better in their eyes to insinuate that Parnell is a stooge for big oil.

    The bill has other features that the oil companies like – it is easier to calculate taxes and provides more uncertainty.

  7. Lynn Willis

    . …..SB21 could not have caused the 2 billion dollar deficit any more than SB21 could have resulted in the upsurge of North Slope investment within weeks of passage. Despite the claims of politicians and their sycophants, revenue collection takes time and corporate infrastructure capital expenditures are not spontaneous actions.
    Please don’t forget the real threat to our state economy which is over spending. Regardless of revenue we are spending in excess of revenues. We can argue all we want about revenue; however, should we continue to spend more than we earn? .Look at the latest state revenue forecast. Pay attention to revenue the forecasts into the future which will never reach todays levels then decide if we can continue on our fiscal path. http://www.ktoo.org/wp-content/uploads/2014/04/SOA-Spring-2014-Revenue-Sources-Book.pdf
    This same Professor Scott Goldsmith testified as a private citizen to Senate Finance on March 25, 2014. At that time he told the Senators that we are consuming our state cash reserves at about “$7 million per day”. You don’t need to be Einstein to calculate that at $7 million per day you will consume a billion dollars of savings every 143 days ($1,000 million (a billion) / divided by $7 million per day = 142.8 days).
    Some now are “spinning” this latest ISER study to make us believe all is well and we can ignore the sleeping giant of state over spending. Don’t believe that spin. We grant our Governor line item veto power yet the current incumbent can’t seem to control spending. We can do better

  8. Shattered

    If I understand what this guy is saying correctly, the State is collecting more under SB21 than they would have under ACES. If so, why are the oil companies fighting so hard to keep SB21 in place? Are they simply altruistic and selfless and want to ensure that the State gets a better share of the revenue generated by North Slope oil?

    I find it hard to believe that so many millions are being spent on lobbyists and advertising campaigns if they don’t stand to get a return on that investment.

    I’m probably wrong. The shareholders and board members in Houston and London are probably far more concerned with what’s in the best interest of Alaska and it’s citizens. That’s the kind of sacrifice that oil companies are known for.

  9. 49er

    I’d like to compliment Amanda Coyne for reporting this story fairly and accurately. Seems like much of the media is biased to the facts on this issue. However, I have become a hige fan of amandacoyne.com because the writing is pretty fair and accurate. I don’t always agree with everything that is written in her blog; however, she’s certainly one of the best poplitical reporter/analysts in the state.

  10. Wes from Fairbanks

    SB 21 is working. If you can’t tell, I’d tell you to open your eyes. For the first tiime, there are now several quality independents on Alaska’s North Slope. This is the next generation of oil development and our future. History will one day appwho supported the change. I would urge Alaskans with kids to vote No on #1.

  11. Jon K

    Not only is Vic apparently clueless about economics, but SB 21 is bringing in new companies and new investment – Hillcorp and Caelues just acquired assets and will be investing billions; new players like Rampart, Royale, NordAq, and Lothian will likely be drilling next year; Brooks Range is moving forward with development at Mustang, and Repsol may commit to a development project after making commercial discoveries. This is all on top of the billions in added investment from the Big 3. The great untold story is how many new players and investors are coming to the state to explore and develop because of SB 21. This simply was not the case with ACES – despite the generous tax credits under ACES, companies were not willing to invest hundreds of millions of dollars when the marginal rate exceeded 80% at high oil prices.

    The Dems and Bill Walker have really done Alaskans a great disservice by misrepresenting SB21 as a give away. While it is a nice talking point that gets repeated over and over, it is a complete distortion of the law and what it was designed to accomplish.

    I wonder how many supporters of the repeal understand that it will bring back the 20 % capital credit, which means the state gives BP Exxon and Conoco a 20 percent credit on top of the standard lease deductions. Thus, for example, Exxon will be getting 20% back on its multiBILLION dollar investment at Point Thomson. Now that’s a giveaway! I’m not sure why Shannon Moore hasn’t told her readers that by repealing SB 21 the state is essentially giving Exxon BP and Conoco 20 cents on every dollar it spends in Alaska. Does Vic Fischer realize this? Do any of the supporters of the referendum?

  12. Jen D.

    New investment = jobs = increased production
    Thank you Scott Goldsmith for your analysis. It’s not rocket science.
    Uunfortunately the debate seems to be “if you hate oil companies and don’t care about the state’s economy vote YES on Ballot Measure #1”. Or, if you care about the state’s economy, have the capacity to study the issue, and want to do what’s best then vote No on Ballot Measure #1. I am truly saddened how some Alaskans are willing to throw the state’s economy into ruin to advance their political agenda.

  13. 357

    My hat is off to Dr. Goldsmith. Thank you for debunking their lies. How oil ever became a partisan issue is beyond me. Senate Bill 21 is working. The uniion halls are empty. The Slope is busy. The increased investment will increase production. There are new players on the Slope. The Democrats pushing repeal are idiots. They do not have the state’s best interests at heart.

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