In the latest battle of the interminable legislative session, the Senate and House majorities are playing dueling news conferences over House Bill 111. The Senate plans to return to Juneau on Today with a proposal it debuted after passing the budget. The House Majority met in a news conference last week to stake out its opposition to the Senate.
There’s plenty worth debating on House Bill 111, but what sticks out is the House Majority’s insistence that there’s no difference between cashsable tax credits (what Alaska’s paying now) and the tax deductions the Senate proposes replacing them with.
The Senate wants to replace the cash payments to the industry nearly one-for-one with deductions that can be applied against future oil taxes. The House argument is that this is essentially delaying the same financial burden to the state. In their calculation, paying out a dollar in cash today is the same as bringing in a dollar less in future taxes.
It’s a point that has been repeated at the news conference, as well as Rep. Les Gara in an editorial and by House Finance Committee Co-chair Rep. Paul Seaton in a letter to constituents.
“The House Majority is concerned that if we end cash credits by just converting them to future tax deductions, this will do nothing to reduce the long-term cost to the state,” Seaton wrote. “Cash paid for credits or tax revenue lost due to tax deductions has the same net cost to the state.”
But the statements ignore key benefits to the state under a deductions system.
Namely, there’s a lot less risk for the state involved with tax deductions that can be broken down into a three key points. Taken together, they explain why a dollar missed in the future is not the same as a dollar paid out today:
The state only has to pay out that dollar if the project ever goes into production. The deductions will only come into play if there’s a tax bill. Some oil exploration projects never go into production so those deductions will never be applied.
The state’s never on the hook for any cash payments. This is a big point as the state, through Gov. Bill Walker’s vetoes and the Legislature’s budgets, is now on the hook for hundreds of millions of cashable oil tax credit payments that it can’t really afford. Under deductions, the state would never have to write a check back to oil companies so it would never get into a similar situation.
Not paying out that dollar now allows the state to put it to work. The state gets to hold onto more cash without the payments and that cash gets to continue raking in investment income. It’s not insignificant either, the permanent fund earns about 7 percent returns, meaning that dollar is nearly two dollars by 2027.
Gara argues this concept of “time value of money” is a wash when you consider inflation, but also argues that it’s not exclusive to the Senate bill because the state is currently delaying its tax payments.
None of these points are secret, either. They’re all laid out in a whitepaper put together by Tax Division Director Ken Alper early on in the process that’s been circulating around. He also appeared on The Midnight Sun Podcast over the weekend, providing a plain-English explanation of the administration’s thoughts on the bill.
“The worst we’re going to get is a smaller amount of taxes, there’s never a negative number,” he said in the podcast.
There’s a real argument to be had here over how the state should treat the deductions—whether they should be counted dollar for dollar like the Senate proposes or at a depreciated rate like the House would like to see. Those are real policy calls that are worthy of consideration, but entering the discussion by looking solely at the dollar figures is a poor starting point.
Save it for 2018
It’s clear that the House Majority is dead set on reopening oil taxes, and it’s hard to blame their eagerness. This is a group of legislators that has been locked out of the discussion on oil tax policy. They now have a seat at the table and don’t want to give up on it. The problem is the other members at the table—namely the Senate Republicans—have no interest in reopening taxes and the governor seems uninterested.
The 2013 Legislature was able to pass a massive overhaul to the taxes, but that was when the House, Senate and governor were all aligned or close to aligned on the issue.
The politics of this year are nowhere close to 2013. The Legislature is divided and the governor is somewhere in the middle and everyone is eying the big races of 2018, which could include an initiative on oil taxes. Expecting a change this year and in this Legislature is, at best, wishful thinking.
The House Majority’s swing-for-the-fences approach is now, at day 175 of being in session, dig-in-your-heels obstinance that ultimately does little to secure the state’s finances. The House Majority would be wise to stay at the table, get what it can and get ready for 2018.