Comment: Rep. Gara’s myopic view

(Reprinted from the Juneau Empire, July 7, 2013)

AN OP-ED BY BRAD KEITHLEY

In a recent My Turn piece (“Answers to questions about the oil tax cut,” June 27, 2013), Rep. Les Gara argues that supporters of SB 21 are “spinning” facts. In fact, Rep. Gara is the one who has gone into full “spin” mode.

The real test of whether a change in tax policy is good or bad is its overall, long term revenue impact, not what it generates in a select number of years. By focusing only on the revenue levels estimated to be produced in the first few years, Rep. Gara argues that SB 21 is failed tax policy, when the full set of facts demonstrates otherwise.

As I outlined in a piece I wrote in the March edition of the Alaska Business Monthly (“Alaska Oil Policy| Maximum Benefit”), a lower tax rate is capable of producing greater overall, long term revenues if the lower rate results in greater overall, long term production. Simplistically speaking, a $20/barrel tax applied to a remaining life of 3 billion barrels produces $60 billion, while a $15/barrel tax applied to a remaining life of 5 billion barrels produces $75 billion.

In that piece I focused on testimony from 2006 — before the passage of PPT (the Petroleum Production Tax) and ACES (Alaska’s Clear and Equitable Share) started to cloud the picture — about potential Alaska production levels at various investment levels. The testimony made clear that lower tax levels produce higher investment levels, that higher investment levels produce higher production levels, and that higher production levels would produce higher overall revenue levels even at lower tax rates.

While Rep. Gara fails to mention it, the same sort of analysis was done in connection with the passage of SB 21. Toward the end of the Legislature’s consideration of SB 21, EconOne, a respected economics consulting firm, was asked to analyze overall, long-term revenue levels at various assumed oil prices. The analysis also took into account the effective tax rate for “new oil,” which Rep. Gara erroneously suggests in his piece was overlooked in the economic forecasts.

The conclusion (at p. 13-19) was that, assuming that lowering taxes resulted over time at least in a moderate production response — a safe assumption based on EconOne’s analysis of global industry experience — the reduced taxes incorporated in SB 21 produced greater overall, long term revenues than continuing with ACES.

To be sure, because the production response built over time, revenues in the first few years were lower under SB 21 than ACES. But that effect was overtaken as production built and at each price level the ultimate, overall revenues received by Alaskans were greater under SB 21 than under ACES.

Some opponents of SB 21 appear to argue that even if true, the overall, long term effect is less important than the near term impact because reduced near term revenues will require lower near term state spending.

The truth of the matter, however, is that reduced spending is coming in any event. A study in January of this year by the University of Alaska — Anchorage’s Institute of Social and Economic Research (ISER) concluded that at current spending levels “reasonable assumptions … suggest [state government does] not have enough cash in reserves to avoid a severe fiscal crunch soon after 2023, and with that fiscal crisis will come an economic crash.”

In response, ISER correctly has recommended that the state adopt a “sustainable budget” model, based on long term revenue expectations. Because SB 21 increases the state’s long term revenue expectations, allowable sustainable state spending levels — both near and long term — actually will increase over time as a result of SB 21 rather than fall.

Frankly, Rep. Gara and other opponents of SB 21 take a short term, myopic view of Alaska, based only on near term effects. Viewed from the long term — and taking into account future as well as current generations of Alaskans — SB 21 incorporates much better fiscal policy.

Bradford G. Keithley is the President and a Principal with Keithley Consulting, LLC, an Alaska-based and focused oil, gas and fiscal policy consultancy. Keithley also publishes the blog, “Thoughts on Alaska Oil & Gas,” at bgkeithley.com.