Several people have asked about how Alaska taxes the oil companies that produce in the state. It’s a complicated, jury-rigged system. Here’s my best attempt to explain it.
Alaska receives royalties from oil and gas production from state-owned lands. It also has several special taxes on oil and gas.
Besides the state production tax, Alaska has a state property tax on oil and gas production facilities and transportation (pipeline) property, which constitutes the state’s only property tax source.
Alaska also has a special corporate income tax that is different from the corporate income tax for non-petroleum firms.
Before PPT and ACES (I’ll explain those terms later) Alaska used to have a gross revenues production tax was based on gross oil and gas production revenues as determined by Pump Station 1 (the beginning of the Trans-Alaska Pipeline) at Prudhoe Bay.
Gross revenues are not calculated from actual sales on the North Slope, however. The nearest markets where the bulk of sales actually occur are on the U.S. West Coast, although some crude oil is actually sold in Fairbanks and Valdez to Alaska refineries.
To determine a gross value of oil at Pump Station 1, the producer must subtract transportation charges from actual sales prices, wherever the transactions occur. These costs consist of tanker charges from Valdez and the trans-Alaska oil pipeline system tariff, or transportation charge, for the pipeline. Once the gross value on the North Slope is determined, the producer multiples the per-barrel value by the number of barrels produced (on a monthly basis) to determine the gross revenue amount. The tax, expressed as a percentage of the gross revenues, is applied to this amount.
The previous tax law also included an incentive for marginal or small fields, known as the Economic Limit Fact, or ELF. Originally implemented in 1977 to aid Cook Inlet oil fields, the state’s goal was to use the ELF formula to tax the prolific North Slope fields at higher rates than the smaller Cook Inlet fields. For various reasons, the ELF became outdated over the years.
Then the legislature, under pressure from Governor-by-Fiat Frank Murkowski, switched to a net revenues tax, the so-called Petroleum Profits Tax (PPT). The net revenues tax is based on the previous gross revenues calculation (market sales minus transportation), with additional allowances for operating and capital costs to be deducted.
However, the PPT is not a true profits tax because not all costs are allowed as deductions. A true profits tax (i.e. an income tax) allows for deductions, such as costs for home office overhead, research and development, etc. The Alaska PPT tax does not allow for these deductions.
An important distinction must be made between the performance of the gross revenues and net revenues tax systems. The net revenues tax makes an allowance for production costs, both operating and capital. The gross revenues tax does not.
Because costs are allowed as deductions in the net revenues tax, no special incentive, such as an ELF formula, is needed to aid high-cost projects, such as heavy oil. A gross revenues tax will severely discriminate against heavy oil.
The discrimination occurs because under a gross revenues tax, costs are not allowed as a deduction against gross taxable revenues. With that, the same tax is applied to heavy oil production – which costs more to produce and so is less profitable for the producers – as applies to more profitable, conventional oil production.
Next post – PPT, VECO, legislative corruption, and the birth of ACES.