After weeks of on-again, off-again negotiations, the Alaska Legislature has cut the state subsidy of oil and gas drilling. A compromise proposal approved Saturday night will save almost $200 million per year within three years.
The last votes on House Bill 111 came with less than an hour remaining in a special session that was set to expire at midnight. The Alaska Senate voted 18-0 and the House voted 33-6 to approve a deal finished about an hour before the final roll call.
Gov. Bill Walker is expected to sign the bill. In a statement released at midnight, he said the bill is “a meaningful step to shore up our financial situation” but warned that “the work is not yet finished.”
Alaska’s deficit remains more than $2 billion per year, and the state’s Constitutional Budget Reserve will have only $2 billion remaining at the end of the current fiscal year. Lawmakers face tough choices in cutting spending, raising taxes, or spending from the Alaska Permanent Fund.
Saturday’s action was one step toward fulfillment of a deficit-fighting plan envisioned by the Alaska House’s coalition majority earlier this year.
To solve the deficit by 2020, the House Majority has been calling for cuts to drilling subsidies, a broad-based tax (such as an income tax), a sustainable draw from the Permanent Fund, and modest budget cuts.
House Bill 111, as passed Saturday night, would replace the state’s existing subsidy program with a new one.
Under existing law, if oil and gas drillers lose money on the North Slope, they can deduct a portion of their losses from future tax bills. Small companies that don’t have oil production (because they’re still exploring and drilling) can instead receive what are known as “cashable credits.”
These credits can be sold to other companies, used when there is production, or sold to the state (when the Legislature appropriates money to buy them).
Lawmakers agreed that system was no longer affordable, but they disagreed on a replacement.
The compromise proposal creates a system of tax writeoffs. Companies can write off their drilling expenses on future production taxes. Those writeoffs are linked to the places where drilling took place. If a company doesn’t ever produce oil from that place, it never benefits from the writeoff.
Furthermore, the writeoff will eventually lose value: 10 percent per year after seven years (if the prospect is producing oil) or 10 years (if the prospect is dry).
According to a fiscal analysis of the bill by the Alaska Department of Revenue, the state will save nothing in the current fiscal year. In FY19, the state will save $95 million; the following year, the savings rise to $185 million.
Between the current fiscal year and fiscal year 2027, the bill will save the state government more than $1.5 billion.
While that might be good news for fiscal hawks, not everyone is pleased.
After passage of the bill, the Alaska Oil and Gas Association published a withering statement damning the proposal and claiming that it will deter future oil and gas drilling here.
Sen. Cathy Giessel, R-Anchorage and one of the bill’s drafters, warned that “this bill, make no mistake about it, is a tax increase.”
She nevertheless voted for it.
On the opposite side, Rep. Sam Kito III, D-Juneau, voted against the final compromise because he felt it didn’t go far enough.
Furthermore, he said, while the bill calls for the creation of a Legislative working group on oil and gas taxes, he’s not sure the group will do what’s needed.
“We probably need to spend more time on dealing with the oil and gas issue. I am concerned that the working group might not be enough to keep the incentive going to make that happen,” he said.
Despite Kito’s opposition (and that of several House Republicans), most lawmakers saw it as something that left almost everyone equally unhappy.
“If you didn’t get everything you wanted in this bill, that’s not an exclusive club,” said Rep. Geran Tarr, D-Anchorage and the chief House negotiator on the bill.
After the vote on the oil issue, lawmakers adjourned the special session and prepared to leave Juneau with one substantial item left undone: the state’s capital construction budget.
Already, the Alaska Department of Transportation has postponed several road repair and improvement projects for lack of funding, and the delays are likely to increase because of Legislative delay.
The Senate voted 17-1 to ask the House to convene for a third special session on Sunday or Monday, but there appeared to be no appetite to do so among members of the House. Forty votes are needed for the Legislature to call itself into special session, which means the support of the House Majority is required.
House Majority Leader Chris Tuck, D-Anchorage, said there was no point in starting a special session until there was agreement on a budget between the House and Senate.
As with House Bill 111, the House and Senate have passed different versions of a capital budget that must be compromised.
If lawmakers were to start a special session without an agreement, Tuck said, that session would resemble the one just ended: Lawmakers would sit in Juneau, collecting per diem pay, until they agreed on a solution.
If lawmakers wait until they have an agreement, they could hold a one-day special session and save money, he suggested.
For his part, Gov. Walker said in his statement that he expects that agreement to come about before July 31.
“Once a deal is reached, I will immediately call them back into session,” he said.
Contact reporter James Brooks at email@example.com or call 523-2258.