By Dennis Hull
As the Biden administration escalates its crusade against American energy, perhaps no state has more to lose than Alaska, where the oil industry and its tax dollars are responsible for up to a third of the state’s economic output and a quarter of its jobs. But some lawmakers in Juneau are considering taking a page out of Biden’s playbook with a suite of harmful new taxes. Unless Republican Gov. Mike Dunleavy and common-sense Republican and Democratic legislators intervene, these tax hikes will drive away production and investment with consequences that will reverberate nationwide.
With Alaska facing a budget deficit of $700 million earlier this year, tax increases have dominated the policy conversation in Juneau. Ideas have included a 40 percent tax hike on oil and gas production companies by nearly halving the per-barrel tax credit. Other targeted taxes would penalize smaller and medium-size energy companies in the state.
But Alaska’s budget already depends overwhelmingly on oil and gas industry revenue. Eighty percent of the state budget has long relied on oil taxes. Since the state already leans so heavily on the energy industry, any unexpected price volatility can quickly cause a headache. If the price of a barrel of crude oil falls by just $1, the state loses $70 million in tax revenue, and vice versa.
Additionally, taxes paid by energy companies are responsible for the creation, growth and success of Alaska’s Permanent Fund. Now worth $76 billion, this unique investment fund pays annual “dividends” to state residents and helps fund government spending. Yet, without royalties and lease payments from producers, the Permanent Fund would never have been possible in the first place.
Drilling in Alaska is a costly, challenging endeavor. Most rigs are situated in the frigid tundra of the Arctic Circle, wherein lies 30 percent of the world’s undiscovered natural gas and up to 160 billion barrels of oil. Adding to the costs of drilling in this unforgiving terrain is the need to transport all that fuel down to customers in Alaska and in the Lower 48. This is a big reason producers in Texas are more than twice as profitable as their counterparts up North, even though Texas has a higher combined tax and royalty rate.
Incentivizing companies to tap into Alaska’s massive oil and gas reserves requires a hospitable tax environment — one that accounts for the expensive realities of cold-weather drilling.
New taxes on oil and gas companies may seem a harmless way to fill in a budget gap. But when you tax something, you naturally get less of it. Companies will respond to higher taxes by scaling back investment, and Alaska’s revenue woes will become a recurring theme rather than a temporary setback. Meanwhile, as Alaskans pay the price through lost jobs and stunted economic growth, the rest of the nation will suffer.
New taxes would threaten the future of existing and up-and-coming drilling projects, including Willow and Pikka on the North Slope. As Americans struggle to afford energy costs amid global dependence on Russia, these projects are critical to creating a stable domestic energy supply that can lower costs and help ensure energy independence. For example, in New England this past winter, the cost of heating was the highest it has been in years. In New Hampshire, heating assistance applications filed from last fall through mid-February were up 35 percent over last year.
But a brighter future may be on the horizon. Earlier this year, lawmakers in Juneau demonstrated remarkable unity in favor of the Willow oil project. Despite enraging his base, President Biden authorized three drilling sites after every state legislator signed onto a unanimous letter of support — personally delivered to the president with the support of Alaska’s entire congressional delegation — that highlighted the “enormous benefits that development of oil and gas resources … would bring to local communities, tribal governments, the state, and the nation.”
Elected officials in Alaska should hold on to that unity in the face of a tax increase that would jeopardize the nationwide economic benefits of new production at Willow. If not, their voters may hold them accountable. In 2020, Alaskans killed a major oil tax hike on the ballot by a 15-point margin, proving their commitment to a flourishing energy industry that many of their livelihoods depend on.
As one of 18 governors who has signed the Taxpayer Protection Pledge, Gov. Dunleavy has repeatedly proven himself to be a capable conservative, demonstrating an uncommon fortitude to resist harmful new taxes on his constituents even under heavy political pressure. Now is the time for Dunleavy and leaders in the legislature to ensure that these ill-conceived, anti-business, anti-energy tax hikes are not revisited.
Dennis Hull is a state policy professional at Americans for Tax Reform. He wrote this for InsideSources.com.
