Research Matters No. 83: Incentives and Assumptions: Comparing Alaska's Oil Production Taxes
August 7, 2014 - Alaskans will soon vote on whether to keep the state's new oil production tax, known as SB 21, that went into effect this year, or to go back to the previous tax, called Alaska's Clear and Equitable Share (ACES). A new analysis by Matthew Berman, professor of economics at ISER, looks broadly at how the new tax compares with the tax it replaced, examining not only how future state revenues might differ under the two systems, but also other differences—how the two compare with older production tax regimes and how government-industry relationships vary under the two systems. His findings include:
• Based on the Alaska Department of Revenue's current assumptions about future oil prices, levels of production, and costs of producing oil, the state's previous oil production tax, Alaska's Clear and Equitable Share (ACES), would collect $1.3 billion more over the next five years—about 12% more revenue—than SB 21.
• SB 21 has a number of drawbacks, compared with earlier systems, including its administrative complexity and its low effective tax rate for new oil—which means that the state's percentage share of the value of the oil is likely to decline over time. Also, while both SB 21 and ACES offer industry incentives for investment, SB 21 offers tax credits at the time of production rather than at the time capital spending occurs, as ACES did. That delay makes the same loss of state revenue (through tax credits) less valuable to the industry under MAPA than under ACES.
• The one major problem of ACES is its high effective tax rates, which could hamper new investment.
Overall, Dr. Berman concludes that the tax system in place before ACES—the Petroleum Profits Tax, replaced by ACES in 2007—is arguably a better fit for Alaska, because it had neither the high tax rates of ACES nor the administrative complexity of SB 21.
Another recent analysis, by Scott Goldsmith, professor emeritus of economics at ISER, also compared SB 21 and ACES, focusing mostly on their potential to generate revenues and create jobs. He found that under a range of assumptions about future oil prices and production costs, SB 21 could generate more revenues, if over time it led to investment that increased oil production more than ACES would have.
Both analyses are intended to help Alaskans understand the complex tax issues, not to advocate for either system. But the two authors reached different conclusions about the potential future revenue-generating effects of the two tax systems, largely because they used different assumptions about future oil production, prices, and costs.
That illustrates how even economists knowledgeable about the mechanics of the complex oil production tax systems can reach different conclusions about likely future conditions in the volatile petroleum industry—and how those conditions might in turn affect future tax revenues.
Matthew Berman's analysis—and Scott Goldsmith's earlier analysis—were both funded in part by ISER's Investing for Alaska research initiative, under a grant from Northrim Bank.
The findings of this analysis are solely those of Matthew Berman, not of ISER, UAA, or Northrim Bank. Download the full analysis, Comparing Alaska’s Oil Production Taxes: Incentives and Assumptions (PDF, 684KB).