What the Legislative Democrats can learn from Ethan Berkowitz

Yesterday’s Anchorage Daily News had an interesting quote from Democrat Representative Berta Gardner in one of the stories on ACES.  See Prominent Alaskans back oil tax relief: Legislature, Anchorage Daily News, Feb. 23, 2011.

“The bottom line is that the industry has said our tax rate is adversely impacting investment, exploration and spending in Alaska but they are unwilling to commit to doing any investment, exploration or spending in exchange for a lower tax rate,”  said Berta Gardner, D-Anchorage and a member of the House Resources Committee that has been hearing the bill for the past couple of weeks. … The Governor’s bill is a giveaway … Gardner said.”

The simple response to Rep. Gardner is that it is unrealistic for her to think that the industry will commit to significant investments and programs which require long term payouts when, on the other hand, the Legislature is unwilling to make long term commitments in its own right that the tax rate won’t go back up once those investments are made.

Given lead times, when making significant investments the industry looks at what the tax rate is going to be 5 years later when production starts, 10 years later when production hits peak, and 15 years later when (hopefully) production is on plateau.  See Alaska’s Future:  Sen. McGuire’s proposed competitiveness review is important, Alaska Dispatch, Feb. 11, 2011.  Why would the industry make investments that look to those time horizons when the Legislature reserves the right in three or four years, after the investments have been made but before significant production begins, to change the tax rate right back to what it is currently under ACES?

Don’t believe the Legislature would act in that fashion?  Then reflect one more time on 2007, when both Republican and Democrat legislators went into frenzied overdrive, one-upping each other with amendment after amendment that increased government take, and put the tax code in the situation in which it currently finds itself.

If the Legislature wants long term investment in this state, then it needs to be prepared to make long term commitments on its side as well.

Interestingly, one of the few people who understood that concept  in the last campaign cycle was Ethan Berkowitz, the former Alaska House Democrat Leader and then- candidate for Governor.  One of the key components of Berkowitz’s “royalty only” proposal was to fix the State’s take of oil revenues by contract.  Once fixed by contract, the level of government take thereafter would not change during the contract’s term, unless agreed by both parties.

As describe by Berkowitz at the time, “we need a system that does a better job encouraging production.  … A good contract protects both parties by containing ‘reopener clauses’ to address changed circumstances in the future. In addition, by reflecting field specific incentives, ramp-ups, and individual field economics, a contract minimizes risk, increasing potential for development.”

By providing a durable level of government take on which investors could rely, Berkowitz’s proposal provided a solid platform for reigniting long term investment in the development of Alaska’s oil.  Representative Gardner’s view on the other hand ensures that, at best, the industry will continue to make only smaller, incremental investments that have short term payouts and result in few jobs or long term production growth.

Bottom Line: The current Legislative Democrats could learn a great deal by looking to their former leader’s suggestions during the last campaign.  If the Legislature wants to encourage — and put itself in a position to expect — significant, long term investments by the oil industry, then the Legislature needs similarly to be prepared to make long term commitments of its own.

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