The Windfall-Profits Tax and Gov. Palin Non-Issue

I have some exciting news!  Bulletproof Diction has become an official endorser of Draft Sarah Palin for Vice-President, which has been doing a wonderful job about getting the message out there about Gov. Palin and why Sen. McCain would be prudent to choose her as VP.  

Update III: Thanks for the link, Draft Sarah Palin for VP!

Update IV: We are also on the blogroll at the hilarious Conservathink.  Thanks Damian G!

Now, on to the post.

I have to confess that when I read this at Hot Air this morning, it felt like a huge punch to the stomach.  Not a good way to start off the day.  I decided to dig deeper to see if I could understand just where Gov. Palin was coming from.  This is so far what I have deduced:

Fact One: Where are the most expensive gas prices in the nation?  Anchorage, Alaska.  

Fact Two: Which state in the US has the lowest population density?  Alaska.

Fact Three: Which state in the US has the lowest individual tax burden?  Alaska.

The choice by Gov. Palin to issue a progressive tax on each barrel of petroleum produced in the state shows that she has quite an acute understanding of economics, unlike our own federal government.  She knows that progressive income taxes provide an incentive to stay in the lowest tax brackets (once again, unlike our own federal government.)  This tax provides an oil company incentive to lower prices per barrel in a state that pays the most for a gallon of gas (even on the stuff that comes from their own backyard.)  The rebate to the people was probably, in a large part, reabsorbed by the oil companies anyway, because what did most people spend it on?  Gas.  If they didn’t, then they likely spent it to boost the economy in some other way (which, in a state with such low population density and so far spread apart, caused the money to be spent on gas vicariously for their products.)  Of course, I certainly hope that Gov. Palin can come out and fully disclose her side of the story soon.

Thanks to Conservathink‘s Damien G. for linking to the Draft Sarah Palin for VP comment area on Hot Air.

Update:  Press release from the Governor’s website.  She clearly states she does not favor a windfall profits tax on oil companies, which is obviously not what she implemented earlier.  The only part of Obama’s plan that she commended was the idea of an energy rebate, because this idea was originally conceived and implemented by Gov. Palin.  Sen. Obama gave absolutely no credit to Gov. Palin. or even mentioned that his “new idea” was a derivative of hers.

Update II:  The article linked to at Hot Air is from the supposedly “conservative” Seattle Times, which, although it endorsed Bush in 2000, endorsed Kerry in 2004.  

Why would this paper want to write such an article about Gov. Palin?  Perhaps we can look for clues in the article.  

Republicans in Congress this June united to defeat a proposed windfall tax on oil companies, deriding it as a bad idea that would discourage investment in U.S. oil exploration.

Things worked out far differently in the GOP stronghold of Alaska, a state whose economic fate is closely tied to the oil industry.

Over the opposition of oil companies, Republican Gov. Sarah Palin and Alaska’s Legislature last year approved a major increase in taxes on the oil industry — a step that has generated stunning new wealth for the state as oil prices soared.

At a time when Americans are feeling the pinch at the gasoline pump and oil companies are racking up record profits, Alaska’s choice foreshadows one of the sharpest debates in the upcoming presidential election.

Democrat Barack Obama supports a national windfall-profits tax, while Republican John McCain opposes it.

Alaska collected an estimated $6 billion from the new tax during the fiscal year that ended June 30, according to the Alaska Oil and Gas Association. That helped push the state’s total oil revenue — from new and existing taxes, as well as royalties — to more than $10 billion, double the amount received last year.

While many other states are confronting big budget deficits because of the troubled economy, Alaska officials are in the enviable position of exploring new ways to spend the state’s multibillion-dollar budget surplus.

Some of that new cash will end up in the wallets of Alaska’s residents.

Palin’s administration last week gained legislative approval for a special $1,200 payment to every Alaskan to help cope with gas prices, which are among the highest in the country.

That check will come on top of the annual dividend of about $2,000 that each resident could receive this year from an oil-wealth savings account.

State Sen. Hollis French, an Anchorage Democrat who supported the windfall tax, said the oil companies ” … were literally printing money on the North Slope. We decided to strike the balance a little bit more on our side.”

The industry, however, warns new taxes are already discouraging future exploration and development in newer, more expensive projects needed to boost waning production in Alaska’s oil patches.

“Clearly, from the investor standpoint, Alaska has become a less attractive place to invest exploration and production dollars,” said Marilyn Crockett, executive director of the Alaska Oil and Gas Association.

Tax imposed by Carter

The oil industry has long fought windfall-profits taxes. Officials cite a congressional study that indicated a windfall-profits tax imposed by President Carter — and later repealed in the 1980s — appeared to discourage U.S. oil-field development.

“It was a bad idea in the 1980s, and it is an even worse idea today,” says an American Petroleum Institute statement on windfall taxes.

The industry’s arguments held sway in the U.S. Senate in June, where Republicans defeated a Democratic proposal for a windfall-profits tax that would have raised an estimated $10 billion to $12 billion.

The debate has spilled into the presidential campaign.

Obama supports a federal windfall-profits tax, with the proceeds used to provide rebates of $500 or $1,000 to taxpayers. “Increased domestic oil exploration certainly has its place,” Obama said last Monday in Michigan. “But it’s not the solution” to America’s energy problems, he added.

McCain has blasted the idea, saying it would “increase our dependence on foreign oil and hinder exactly the same kind of domestic exploration and production we need.”

In Alaska, the willingness of Republicans to tax the oil industry reflects unusual political developments.

Last year, as part of a major federal corruption investigation, an oil-services executive — former VECO Chairman Bill Allen — pleaded guilty to bribing some state legislators as he sought to limit the size of an oil-tax increase approved in 2006.

In the fall primary of 2006, Palin upset Republican incumbent Gov. Frank Murkowski, whom she criticized for giving too much of a break to the oil industry.

Then last year, Palin introduced a graduated tax pegged to increased oil prices. The state Legislature modified her proposal to increase the state’s take even further.

Production falling

The bill’s proponents — a coalition of Democrats and maverick Republicans — argued that oil production was declining in Alaska, and that the lower tax rate under previous governors had done little to spur additional investment in the state’s oil industry.

Critics say the companies, who have lobbied to open the federal Arctic National Wildlife Refuge to exploration, have lagged badly in developing already available fields on state lands. Some estimates indicate those fields may contain billions of barrels of oil, mostly heavy crude that’s difficult to extract.

They argue that the state — which owns most of the land around Prudhoe Bay, North America’s largest oil field — needs to grab its fair share of proceeds from the declining output there.

“You don’t get to grow another oil barrel,” said French, the Anchorage lawmaker. “You sell that barrel once, and it’s gone forever.”

The Alaska tax is imposed on the net profit earned on each barrel of oil pumped from state-owned land, after deducting costs for production and transportation, which are currently estimated at just under $25 a barrel.

The tax is set at its highest rate in Prudhoe Bay, where the state takes 25 percent of the net profit of a barrel when its price is at or below $52.

The percentage then escalates as oil prices rise over that benchmark. Alaska gets about $49 of a $120 barrel, not counting other fees.

ConocoPhillips said that in total, once royalty payments and other taxes are added in, the state captures about 75 percent of the value of a barrel.

An accounting benefit eases the sting for oil companies. They get a huge deduction on their state taxes when calculating their federal taxes.

Companies pull back

Still, oil-industry officials contend the tax already has affected investment decisions.

BP Alaska, which runs Prudhoe Bay, said earlier this year that it had delayed the development in the western region of the North Slope as a result of the tax. ConocoPhillips cited the same reason for scrapping a $300 million refinery project.

“What the tax has done is take away all the upside,” said Doug Suttles, president of BP Alaska. The U.K.-based oil company paid more than $500 million in taxes to Alaska last quarter — far more than it earned in profits from Alaskan oil, according to Suttles.

Investment dollars are flowing instead to places that have a better return, like the massive deep-water projects offshore in the U.S. Gulf of Mexico, where ConocoPhillips said the government take equals less than 50 percent of the barrel.

In July, BP announced it would begin developing the Liberty oil field, a $1.5 billion project expected to yield 100 million barrels of oil, located on federal lands in Alaska. If the project had been located in state lands on the North Slope, “I don’t think we’d have been able to make that investment,” Suttles said.

Alaska state officials say they still do plenty to court the oil industry, such as giving small, independent producers breaks on royalty payments. And the state tax bill includes a generous provision for deducting investments in new fields or other capital costs.

“We think that, hopefully, [the new tax system] will encourage firms to get on the Slope and produce more oil and gas,” said state petroleum economist Cherie Nienhuis.

Prices spur global trend

Alaska’s decision to raise taxes is part of a global trend. Emboldened by high energy prices and the industry’s difficulty in finding giant new oil fields, oil-rich nations from Venezuela to Russia have been raising taxes and royalty payments in recent years.

Even the market-friendly United Kingdom, home to oil giants BP and Royal Dutch Shell, recently has sought to capture a bigger share of revenue from companies operating in the North Sea.

Despite the oil companies’ complaints, many say that as they vie for access to new oil and gas deposits, they have little choice but to accept deals they once might have spurned.

Many Alaskans are happy to have newfound leverage over oil companies in what they see as the state’s last big boom. But others see it as a tricky issue for the state.

Although Alaska’s huge resources and relative political stability make it affordable for oil firms to pay huge taxes there, “you don’t want take so much that you discourage activity,” said Kenneth Medlock, a petroleum economist at Rice University in Houston. “You want to strike that fine balance.”

All of the emphasis is added.  It’s clear that the article hides all of the benefits of the bill deep within the fine print, including the fact that Palin’s original proposal was altered significantly by the Alaskan Legislature.  

Why would the Seattle Times want to publish such an obstructionary article?  Perhaps because, to the Dems, Gov. Palin is Enemy No. 1 on McCain’s VP list.  She has a lily-white record so far among conservatives in Alaska and across the country, and has shown the ability to reach across the aisle when necessary.  The Dems are scared that such an attractive candidate (ideologically, electorally, and, admittedly, physically) to conservatives and moderates, and a woman no less, could dissipate the new-car smell that surrounds Sen. Obama and attract bitter Hillary voters.  As long as they can find one reason for conservatives to shy away from Gov. Palin, and be able to deconstruct one of her strong suits (energy policy,) then they have done their job.  Unfortunately for them, conservatives are smarter than they thought.


19 Responses to “The Windfall-Profits Tax and Gov. Palin Non-Issue”

  1. (1) This isn’t a corporate income tax. It’s a state severance tax. Severance taxes are COMMONLY charged by states on producing companies who are removing previously untaxed mineral, oil, or gas resources.

    (2) The Palin administration was reacting to the previous severance tax having been negotiated behind closed doors by too-cozy Gov. Frank Murkowski (whom Palin defeated) and key state legislators who are now in prison for official corruption.

    (3) After the open-door, fully transparent negotiations her administration led, the increase was actually from a base rate of 22.5% to 25%.

    (4) Yes, beyond that it’s progressive, but not nearly to the extent the Seattle article suggests. From CCH, the most reliable resource used by tax lawyers:

    The base tax rate is increased from 22.5% to 25% of the annual production tax value of taxable oil and gas. When a producer’s average monthly production tax value per BTU equivalent barrel of taxable oil and gas is between $30 and $92.50, an additional tax of 0.4% is imposed on the difference between the average monthly production tax value and $30. Formerly, the additional tax was 0.25%. When a producer’s average monthly production tax value exceeds $92.50, the additional tax is 0.1% of the difference between the monthly production tax value and $92.50. The new tax rates are effective July 1, 2007.

    I’m hoping Cap’n Ed will do an update; I’ve emailed him.

  2. Sharon Wall Says:

    Alaska’s tax is not a windfall profits tax. Alaska owns the oil that is coming out of the state-owned ground the wells are drilled on. All Alaska is doing is sharing in the profits on their own oil.
    A windfall profits tax by the Feds is different in that they don’t own the oil and are taking profits away from oil companies that they had nothing to do with producing.
    Not so in the case of Alaska… We the people own the oil and deserve part of the profits derived from our resources.

  3. Why? Because she’s the most liberal governor the State of Alaska has ever seen!

    P.S. FYI: Palin is currently under investigation and has recently had an ethics complaint filed against her.

  4. Beldar: Thanks for the info. I’m glad that people with an actual foundation in accounting and economics are taking up this issue.

    Sharon Wall: I agree with your sentiment that resources are basically a states rights issue. I think that the article said that the BP drilling on the Liberty Project was being done on federal land. I wish the article could have been more specific as to whether or not the tax would affect that particular site.

    Visitor: I think that it is way off base to call Gov. Palin a liberal. She is anything but. The investigations against her have been thoroughly debunked and the rest is pomp and circumstance.

  5. Palin has openly answered questions regarding that ethics complaint which claims that she had something to do in the firing of her sister’s ex-husband. She said in an interview on Kudlow & Co. that the ex-brother-in-law in question hasn’t been a part of her family in some time and that she wasn’t worried and trusted the investigation to come to a proper conclusion of her innocence.

  6. Palin’s “not worried”? Oh really?

    Read this:

    “The governor has directed the AG to conduct an ‘under oath’ inquisition of everyone at DPS to find out what they know and what they might tell the special investigator. This is totally out of bounds. I won’t say illegal, but some folks I trust say it is illegal use of the AGs office by the governor. Cockerham has been tipped on this one, but I don’t know if the folks at DPS are willing to say anything.”

  7. Visitor: Two “anonymous sources” do not constitute a story. After a quick scan of Halcro’s site, it appears the man has something against the Governor. Wikipedia confirms my convictions:

    “Since losing his gubernatorial bid, Halcro has dedicated his site as a vehicle for mud-slinging towards Gov Sarah Palin, his former opponent in the race.”

    Not exactly the most objective source of information.

  8. Get on Board the Palin Express…

    America needs Sen. McCain with Gov. Palin…

  9. FYI: It has since been confirmed that Attorney Governor Talis Colberg has authorized a “fact finding” investigation into any relevant communications between Palin administration employees and employees of the DPS regarding potential pressure brought to force Monegan to fire Wooten.

    Someone define witness tampering to me.

  10. “Visitor”,

    That is NOT witness tampering. That is investigating the communications that took place. The investigation is not only that Palin may have pressured Monegan, but that administration personnel may have.

    Palin is merely making sure that it is ALL above the table. She is not hiding anything.

  11. By the way,

    Correct me if I’m wrong, but I heard that Alaska has


    state income tax. That makes Palin MORE conservative than any Veep prospect.

    That’s NO income tax!!!!!!!!

    I wish my state had NO income tax.

  12. Alaska doesn’t have a state income tax because they have oil. The oil industry in Alaska funds 90% of the State budget. Including the 23% increase in the operating budget by Governor Palin.

  13. Tom: You’re right. It would be fantastic if more states had an income tax.

    Billy M: It’s true that most of the state budget is petroleum-funded.

  14. It’s also true that Governor Sarah Palin grew the fy09 operating budget 23%.

  15. Billy M: Really? Where’s your source for that evidence? I checked the pdfs from 2008 and 2009 and found that Gov. Palin reduced the FY09 component budget from $2,477,000 for FY08 to $2,055,900 for FY09 and cut full-time employees from 21 in FY08 to 17 in FY09.



  16. Palin has stated that she has gay friends, and is receptive to gay and lesbian concerns about discrimination. While the previous administration did not implement same-sex benefits, Palin complied with a state Supreme Court order and signed them into law.

    Palin’s first veto was used on legislation that would have barred the state from granting benefits to gay state employees and their partners. In effect, her veto granted State of Alaska benefits to same-sex couples.

  17. Bob: Thanks for the Wikipedia verbatim. What you forgot to include was “The veto occurred after Palin consulted with Alaska’s attorney general on the constitutionality of the legislation.”

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