"I predict this unexpected tax increase will have a chilling effect on the industry in the long term, because companies will be less inclined to invest in oil fields."
- Rep. Kohring
On January 12, 2005, the governor delivered his annual State of the State address. The speech covered many areas, but the administrationís new policy toward Alaskaís oil industry is a major deviation. Several changes were outlined. Most notably a change in tax policy with the result of oil companies being sent an immediate tax bill of up to $150 million, directly contradicting the anti-tax rhetoric of the 2002 gubernatorial campaign. Do you remember the governorís promise to "grow our way instead of taxing our way out of the budget deficit?" It still can be achieved.
The administrationís change of direction occurred without many in the Legislature first being consulted or asked the tough questions, "What effect will a major tax increase have on the oil industry at this time?" Instead we should be asking, "What other ways are there to expand our economy WITHOUT further taxes?"
These issues need to be evaluated individually. The first and most dramatic is the collection of additional taxes from the oil industry of hundreds of millions of dollars. The State has the legal authority to collect these taxes, but for good reason it has avoided doing so for years to encourage further oil and gas exploration and development. These old taxes, but new collection efforts, are the OPPOSITE of what should be done.
This proposal takes a large bite out of the very hand that feeds us. If tax proponentsí goal is increased revenue, then we should remind ourselves of the well-known fact that low taxes and a steady tax policy help industry better anticipate the future and become more productive. An instant and significant tax bill tears apart the underpinnings of stable government.
The timing of this considerable tax demand could not be worse. It came when oil companies are negotiating with the State on how best or even if a natural gas pipeline can be constructed without running millions in the red. The planning of such a billion dollar mega-project demands, more than anything, a clear understanding and expectation of the Stateís tax and regulatory climateóincluding low tax rates. This was spelled out in "ELF" Legislation that lowered taxes to spur development in previously marginal oil fields. As Chair of the Legislatureís Oil and Gas Committee, I object to such a sudden, major tax hike.
I predict this unexpected tax increase will have a chilling effect on the industry in the long term, because companies will be less inclined to invest in oil fields. Iím already hearing talk that millions of dollars of planned investments will be placed on hold, and wells could be shut down because they no longer will be profitable. The precedent this tax policy sets is frightening. If the state is willing to do this now, what assurances are there that it wonít happen again? The suppression of the economy will eventually translate into fewer jobs and less money flowing through the state.
Tax increases of this magnitude should have been proposed in the form of legislation instead of a simple, abrupt administrative order. Then we could have had time to thoroughly discuss it and see itís regrettable aspects.
Have you ever known a society to grow and prosper by INCREASING taxes? Have you ever known businessmen to flock to a place where taxes are high and government tax policy is capricious? Show me the statistics, which demonstrate that a society taxed its way to success. It canít be done.
Our best bet is to travel the economic road of free enterprise with limited, predictable taxes. Government should keep taxes low to attract productive men and women to Alaska who will build the State instead of socially engineer it. If we wish to attract investment capital to construct massive projects like the proposed gas pipeline, then economic freedom is a must.