10 years after SB 21 oil tax, we still don't know who came up with the $8 per barrel credit plan

In the decade since its adoption by the Legislature, one of the enduring mysteries of the Alaska oil tax system known as SB 21 is that no one ever explained where the $8-per-barrel tax credit plan came from or justified the choice of that number.

On the afternoon of March 29, 2013, the sliding scale appeared as if by magic in a House Resources Committee bill, replacing the $5 per barrel credit that had been in the Senate version.

The sliding scale did not exist a day earlier on March 28, when Natural Resources Commissioner Dan Sullivan and Revenue Commissioner Bryan Butcher acted as if the plan remained to provide a maximum $5 per barrel credit, as shown in this slide they presented.

There was no mention of the plan to increase the per barrel credit the next day, a move that changed every calculation. This decision, made with little analysis or public understanding a decade ago, is still costing the state hundreds of millions a year.

The change was probably the work of the oil industry consulting with state consultants, Gov. Sean Parnell’s revenue department and GOP legislators who wanted to cut oil taxes.

SB 21 received final approval from the Legislature about two weeks after the $8 provision entered the picture.

In 2017, Homer Rep. Paul Seaton, a Republican who had been on the resources committee when SB 21 was approved, told other legislators that “no one knows” where the $8 plan came from.

On March 27, 2013, when the bill still contained a $5 per barrel credit, the oil companies kind of liked the idea, but some wanted more credit. They got it.

While Senate Bill 21 referred to the per-barrel credit as a credit and it was promoted as the means of linking production to credits, it didn’t take long before we began to hear complaints from the oil industry that these were not credits at all.

It was just a math formula inserted into the bill that dressed up the lower tax rate as a sliding-scale "credit.” But the supporters of lower taxes on the oil industry opted to describe the math formula as a credit in 2013, guaranteeing that 10 years later Alaskans would still be calling it a credit.

The credit drops with rising prices and disappears when oil reaches $160. At that price, the tax rate would be near 35 percent, in theory.

Janek Mayer and Nikos Tsafos, then partners in the consulting company Enalytica, told lawmakers in 2015 that the per-barrel tax credit should be thought of as a way to lower the tax rate when oil prices were below $160. The consultants referred to the credit as a "mild form of reverse progressivity," meaning that the tax would be lower at $90 when the credit is highest. 

"Thinking about it as a credit in terms of money that's somehow being handed back to companies is incorrect. This is simply a feature of the tax system that is intentionally designed to reduce the tax level at lower oil prices," said Mayer.

Mayer was wrong.

It should be thought of as a credit because it is a credit in state law, one the companies collect in the form of paying a great deal less in production taxes than they would without the credit.

The per-barrel credit system gives the highest reward for production when oil is priced at about $90 per barrel. The credits disappear when oil hits $160.

On Friday, the Senate Finance Committee is to hear a bill at 9 a.m. that would reduce the maximum credit from $8 to $5 a barrel. Even Gov. Mike Dunleavy said two years ago he would support the reduction of the maximum credit to $5 if the Legislature took the lead.

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