Tax Convos Ramp Up

Our first tax conversation will be about SB 92, a bill to institute a new income tax on oil and gas S-Corps. It received its first hearing last week before the Senate Resources Committee of which I am a member.

A little background: S-Corps can’t deduct on their federal taxes the oil and gas items that C- Corps can, so the income level which the state would tax for an S-Corp is higher than it otherwise would be. The rate under SB 92, however, on S-Corps would be the same as it is on C-Corps (9.34%). This is one of several problems I see with the bill.

Another is the fact that it’s going after gas production in Cook Inlet – when we desperately need more gas drilling, not less. Remember the old economic adage (Laffer curve theory): the more you tax, the less you’ll get. Want people to buy fewer cigarettes? Tax them more. Want people to buy fewer sugary sodas? Tax them more.

Want companies to produce less gas? Tax them more. It’s true that the targeted compnay, Hilcorp, has certain contracts for gas it’s obligated to fill but some of those contracts will be expiring in a couple years. And what about Marathon that purchases gas now but there’s not a contract?

I don’t know how our Alaska judges would rule, but our bills are not supposed to impact only one player whether that player be one hairdresser, one bingo parlor, one medical establishment, or one oil and gas company. SB 92 is targeting one player: Hilcorp. That yet is another problem with SB 92.

As a lawmaker, I’d be neglecting my duty if I didn’t weigh the impact of the bill on other industry activity and future projects and what that would mean for Alaskans. Will the bill passing mean less capital investment and less production by the company it’s targeting? Will it mean fewer direct and indirect jobs and even that some people will lose their jobs? Will it mean less oil in TAPs and less oil revenue to the state?

Ultimately, these questions lead to another elephant in the room. With an uptick in interest in D.C. in Alaska helping the US become energy independent, will a move to increase taxes deter companies’ interest in investing in Alaska and helping develop our resources overall? With a federal administration poised to support new projects in Alaska, the timing of SB 92 couldn’t be worse. A state that changes and increases taxes after a business has set up shop is the opposite of a business-friendly state.

It is short-sighted to pass a bill to pull in more revenue right away if it results in stunting the growth of our economy and a larger amount of revenue that growth would provide in a few years. Better to leave the tax structure as is and welcome new activity. Better to increase the tax base than to increase taxes.

Many Alaskans equate the reduction of the statutory PFD as a tax. This year, the Senate Finance Committee has discussed a $1400 PFD (a 25/75 split of the draw from the Permanent Fund (PF) Earnings Reserve Account: 25% toward the PFD and 75% toward the state budget). Some are discussing pulling yet another $325 million from the Senate Finance Co-Chairs’ planned portion for the PFD (25% of PF earnings) to pay for the state budget; this would reduce the PFD down yet again, to $1000. Those interested in this scheme want to use the $325 million for reinstating pensions and to increase the BSA higher than what other legislators believe is sustainable.

A second conversation about revenues: mentions of this type of tax have picked up but no bill on this topic has thus far been filed. I’ve just heard chatter that the personal income tax is coming, that it is inevitable, that it “needs” to happen. I couldn’t disagree more, but we’ll take this topic up at a later time if a bill is proposed.

So we’ve been hearing of the majority’s hope for new revenues. The Senate Republican caucus has taken a different approach.

I filed SB 107 this past week, the Alaska Sunset Commission. It’s doge at a more methodical and consistent pace year in and year out than what current and past presidents do after entering office, but it is doge with teeth. It is one of the Senate Republican Caucus’ responsible FISCAL PLAN pieces.

While the majorities are talking about increasing spending and taxes, our caucus is looking long term at responsible stewardship of public dollars and efficient and effective state government. Senator James Kaufman has filed SB 36 and SJR 4 regarding a spending cap as well as SJR 5 regarding PFDs and the Permanent Fund and SB 37 pertaining to strategic plans for state agencies. Scroll down to see more about my Alaska Sunset Commission bill, SB 107.