Why Is Alaska Overtaxing Its Most Important Industry?

As we head into the homestretch of much-needed tax reform in Washington, Americans back home need to understand that the political turmoil doesn’t just reside in the Swamp. States facing significant financial hardships face difficult choices as well. And instead of looking to create fair policy that encourages growth, some states, like Alaska, are looking to reprimand industries who are the backbone to the economy – costing Americans opportunity and growth.

Alaska’s Legislature is particularly known for debating the role the oil and gas industry plays in the state’s economy. In fact, economic opportunity in the Last Frontier has long been inextricably linked to oil and gas. That’s true for the thousands of Alaskans who make their living in energy development or in support of it. Yet, it’s also true for state government, which relies almost exclusively on the taxes and royalties paid by the industry to provide services and stay solvent.

One would think that a state that derived 72 percent of unrestricted revenue last year from a single source – the oil and gas industry – would work hard to ensure that it is able to operate in a stable business and policy environment. And when market conditions turn against that source – as they have amid low crude pricesand high operating costs – conventional wisdom suggests that keeping tax and regulatory burdens from becoming too heavy should be a priority.

That has not been the case in Alaska, where legislators have imposed seven rounds of major changes to the tax system over the last 12 years that impact the oil and gas industry – including the recently passed HB 111 – all in an attempt to fix the budget deficit.

If the goal is to reinvigorate the economy and spur the type of activity that can grow the revenue base, then tax hikes targeted against a leading industry are a case study in what not to do. And with Congress and the White House now focused on reforming the tax code, the situation in Alaska serves as a worthwhile learning opportunity. As options are weighed, officials should note that effective tax reform, at any level of government, must allow the engine of economic growth to operate efficiently in any market environment.

Tax policy should be stable and predictable, enabling confident private sector investment that is more resilient to changing business climates. It must also endeavor to treat all sectors as neutrally as is possible in light of their business models. Targeting any single industry with tax hikes is in direct conflict with these goals, but in Alaska’s case it’s particularly egregious at a moment when oil and gas are under some of the greatest cost and price pressure in decades.

Alaska needs the energy sector to be productive. Government statisticsacknowledge, for example, that “mining” (which includes oil and gas) is the largest private-sector source of Gross State Product.  A broader-based study by the McDowell Group, in partnership with industry, concluded that nearly 46,000 direct, supporting, or indirect jobs in the state are linked to oil and gas, amounting to $3.1 billion in wages.  Economic output like that can’t be simply replaced or replicated overnight.

The plan to more heavily tax the industry fails to meet the goals of effective tax policy, and not just because such a scheme serves as a political band-aid to cover more serious, structural spending pressures on the state’s budget.  It also fails because an unnecessarily harsh tax regime would make it extremely difficult for the industry to continue its already prolific economic contribution.

The oil industry has remained productive during the recent downswing in crude prices thanks to smart, proactive investment and careful management of its own resources even as costs have increased. Such investment can’t overcome shortsighted government actions. One major oil developer has already slammed the brakes on a multi-billion-dollar project thanks to tax uncertainty, and there’s ample reason to think that more could follow.

Alaska has fought hard to earn the third-highest ranking on Tax Foundation’s State Business Tax Climate Index, by wisely avoiding counterproductive schemes like steeply graduated income taxes on its citizens. On the other hand, the state is notorious for having one of the highest marginal corporate tax rates in the entire country. Awareness of both these facts should steer the state away from discriminatory tax hikes on any part of the business community -- especially it’s most prominent economic contributor – and toward competitive economic growth.

Those are lessons that tax-writers, policymakers, and investors would do well to heed.