Alaska legislators prepare to talk taxes after grim new oil revenue forecast

The Alaska Legislature is preparing to examine two new tax proposals after a state revenue forecast showed significant long-term budget deficits even with a sharply reduced Permanent Fund dividend.

One proposal, introduced Friday by Sen. Bill Wielechowski, D-Anchorage, would cut an oil production tax credit and close what he describes as a loophole in the state’s corporate income tax. The second proposal, expected as soon as Monday from Rep. Ben Carpenter, R-Nikiski, would create a state sales tax.

The sales tax bill has been scheduled for a hearing Wednesday night in the House Ways and Means Committee, which Carpenter chairs. The oil tax bill has been scheduled for a hearing Friday morning in the Senate Finance Committee.

“We have to fund our basic services,” Wielechowski said. “And that’s to the benefit of the (oil) industry as well. So if the industry doesn’t support this, and they have a better solution, I’m all ears.”

Budget deficits loom, even with a small dividend

Alexei Painter, director of the nonpartisan Legislative Finance Division, said on Friday that under the state’s new revenue forecast, at present levels of spending and with a $2,700 Permanent Fund dividend, the state budget runs a deficit of about $560 million in fiscal year 2024, which starts July 1.

If legislators cut the dividend to $1,350 per recipient, there’s a $300 million surplus, but that doesn’t take into account a possible funding increase for K-12 schools or any other spending increases.

An education funding increase is likely to cost between $175 million and $260 million, based on different ideas under discussion in House and Senate committees.

The $1,350 dividend is based on a proposed new distribution formula under discussion in the Senate Finance Committee.

Called the 75-25, the formula pencils out if used next year, but projections show that it creates significant deficits in the long term — as much as $230 million by the end of the decade. Under the formula, a quarter of the annual draw from the Permanent Fund would go toward dividends, with the rest funding government.

The 75-25 is on the low end of several new dividend formulas under discussion in the Capitol this year, and some lawmakers are wary of going low because dividend reductions act as a regressive tax: Because all Alaskans receive the same dividend, it comprises a higher share of poor Alaskans’ incomes, so a reduction in its amount is a bigger hit to them.

“I don’t believe that only the people of Alaska should be hit by a $1.3 billion reduction in dividends. I think that we should consider other options and other players to balance out the state’s checkbook,” said Sen. Lyman Hoffman, D-Bethel, after hearing Painter’s figures.

Opinions differ on the best solution

It remains to be seen how the Legislature will address the issue. The state’s Constitutional Budget Reserve, its largest savings account, has a balance large enough to pay for a $2,700 per-person dividend this year, but if trends continue, it couldn’t do the same next year without consequences.

On its first day, Wielechowski’s proposal earned a mixed reaction, even among his colleagues in the bipartisan Senate majority.

Sen. Jesse Bjorkman, R-Nikiski, said he opposes Wielechowski’s plan.

“The bottom line for me is I’m not interested in taxing producers and people who work in order to give money to people who don’t work,” he said.

Bjorkman said he prefers another option, possibly a sales tax.

“I would be interested in supporting some kind of temporary seasonal sales tax or tax that allows our visitors to pay for many of the benefits that are provided to them when they come in and visit Alaska,” he said.

Sen. Löki Tobin, D-Anchorage and one of the strongest supporters of a proposal to increase K-12 school funding, said she wants to see data in Senate Finance before deciding whether the oil tax increase is the best approach.

“I think we’re starting the process now to figure out if this is the best way to go about it,” she said.

She said she’s unlikely to support a sales tax.

“All the research I’ve done about a sales tax shows it’s really regressive,” she said.

Wielechowski offers three-layered approach

The details of Carpenter’s sales tax bill won’t be released until Monday, and his office said he was not immediately available for an interview.

Wielechowski’s bill includes three main provisions:

• Right now, the state gives oil producers a tax credit on each barrel of oil they pull from the ground. That credit would fall from $8 per barrel to $5, and companies would be limited on the amount of credits they can spend in a given year. That limit would be the amount they spend on capital expenses — drilling and construction, for example — each year. If they only spend $200 million on new drilling, that’s the amount they can deduct from their production tax payments in a given year. A limit doesn’t currently exist.

• It would also change a provision in the state’s corporate tax structure. Companies like Hilcorp, which is privately owned, would no longer pay lower corporate income taxes than companies like BP, which was publicly owned and owned a significant share of Prudhoe Bay before selling to Hilcorp.

• The third main part, called “ringfencing,” says that companies who receive tax credits can only use them on oil produced from facilities for which they received the credits in the first place. For example, if ConocoPhillips received $200 million in credits for work on its new Willow project, those credits could only be applied to production taxes levied on oil from Willow.

Wielechowski expects the change in the per-barrel credit to be worth between $400 million and $500 million per year. The change to the corporate tax would be worth $139 million per year, he said, and the value of the ringfencing provision will vary significantly based on the price of oil, Wielechowski said.

At present prices, it’s about a $30 million or $40 million per-year value; if oil averages $90 per barrel, it could be worth $750 million a year, Wielechowski estimates.

To become law, Wielechowski’s bill or Carpenter’s proposal would have to pass both House and Senate, then get the approval of Gov. Mike Dunleavy, who could veto the measure.

“For many in my caucus, the majority of folks prefer a sales tax over an income tax. And as far as taxation changes on the oil companies, I think you’re going to have a mixed bag there,” said Speaker of the House Cathy Tilton, R-Wasilla.

“If this bill goes to the House, put it on the floor. That’s all I ask,” Wielechowski said of the measure’s prospects there. “Give it an up or down vote.”

Dunleavy has previously said he opposes tax increases without a statewide referendum, going so far as to veto a minor tax increase on ecigarettes last year.

Wielechowski said he has had “productive” discussions with the governor’s office about the proposal and hopes Dunleavy takes it seriously.

“I’ve been in conversations with the governor’s office. People understand that we’re at a point now where we’ve got to fund our schools, we’ve got to fund our roads, we all want to help the PFD. We can’t afford those things right now,” Wielechowski said.