National Tax Reformers Should Look to Alaska for Landmines
Across the United States, people are talking about tax reform. Comprehensive overhaul of the federal tax code was a core part of President Trump’s campaign platform, and voters on both sides of the aisle share a desire for a more efficient, modern, and competitive tax code that can help our economy grow and correct decades of the current tax code’s disadvantages for individuals and businesses.
Tax reform is a very good thing. But the debate underway today in Alaska shows just how important the nuts and bolts of the reform process are, and how vital it is that significant tax policy shifts be handled thoughtfully. Poorly structured tax changes – such as the House oil tax measure under consideration in a high-stakes conference negotiation – could leave the state in even worse shape than it currently finds itself.
The budget situation in Alaska is dire, with the state facing a roughly $3 billion deficit in 2017. Lawmakers are scrambling to find a solution to the problem before a July 1 deadline passes and a government shutdown commences – an outcome that no one in the state wants. Despite the shared goals, though, compromise has been elusive, thanks in part to the potentially catastrophic plan to levy a “massive tax increase” on the state’s oil industry.
Low oil prices, combined with ballooning state spending, have contributed heavily to the state's deficit. Alaska’s budget is inextricably linked to the oil and gas industry, with around 90 percent of the state's revenue coming from oil, so when prices or production levels suffer, Alaska suffers too.
Lawmakers are doing the right thing in seeking to bring the tax code’s treatment of the oil industry in line with the current crude oil price trends. But the House bill serves as sobering example of what can go wrong when tax writers are more focused on short-term fixes and politics than they are on effective policy that’s built to last.
The fatal flaw in the House plan lies in its effort to fix the state's budget problem by taxing even more heavily the industry that is more important to the state’s economic future than any other.
A well-worn cliché within government says that if you want less of something, you should tax it more. If that's true – and generally speaking, it is – then imposing onerous taxes on the oil industry in an attempt to offset profligate government spending and low crude prices is a recipe for fiscal disaster.
The oil industry’s importance to Alaska is difficult to overstate. Analysts from the McDowell Group recently assessed the statewide and local impacts of the oil and gas industry, examining factors ranging from employment, to taxes, to royalties paid. Studying Alaska’s 14 major oil and gas companies and considering direct, indirect induced economic effects, McDowell found that in 2016 the industry employed 45,575 workers and paid $3.1 billion in wages; those same companies also paid $2.1 billion in taxes and royalties last year.
That's only part of the story. When the oil industry’s tax and royalty payments are viewed through the lens of public finance, another 58,300 jobs and $2.9 billion in wages are added to the industry’s economic footprint in Alaska.
That brings the oil and gas industry’s total economic impact on Alaska last year to 103,875 jobs and $6 billion in wages. When and if oil prices rebound from current levels, the employment and wage benefits stand to be even larger.
The industry has made it clear that the House measure under consideration would make it more hesitant to invest in the state, discouraging companies from pursuing inherently high-risk projects for fear of an unfriendly tax regime that makes energy exploration and development unprofitable. Caelus Energy already has delayed one major project, and more are sure to follow suit if the House’s tax plan is adopted.
That possibility should concern all Alaskans. Tax policy that targets a crucial contributor to the state’s economy should be viewed cautiously and rejected in favor of a more balanced alternative, such as the one before the Senate. Principled tax reform, paired with dramatically lower government spending, can put Alaska’s budget back on track.
Done right, tax and budget reform represents a chance to make an economy’s future brighter and more competitive. Done wrong, it can do just the opposite.
Alaska’ lawmakers are playing a high-stakes game; it's critical that they think through tax reform proposals carefully.