Video: Palin’s got a fee-vah and the only prescription is more Hopenchange

Iowandslow
Here is the full article courtesy of the WSJ

Oil companies in Alaska are paying more money in taxes than ever before. The state’s oil and gas tax revenues for its just-ended fiscal 2007 topped $10 billion. That’s twice as much as fiscal 2006 and four times more than 2004.

Some supporters of Barack Obama see that money coming in and say that John McCain’s running mate, Alaska Gov. Sarah Palin, must have done what Sen. Obama wants to do — sock those companies with a big fat windfall profit tax. This is a deeply misleading reading of her 2007 tax reform.

A few years ago, Alaska had a big problem. Despite high oil prices, the state’s fiscal future was in peril because the state relies on only three aging oilfields for 80% of its oil and gas tax revenue.

In 2006, then Gov. Frank Murkowski, a Republican, proposed changing the state’s tax on oil from a gross-revenue to a net-revenue basis. Instead of creaming 10% off the top — which was how the mature oil fields were taxed — Mr. Murkowski pushed to tax oil companies on their profits only, at a rate of 22.5%. The change in tax regime was meant to encourage investment in and development of new fields.

In effect, the state would become the oil companies’ development partner. It would participate in the upside of oil and gas exploration, but only after the companies had recovered the enormous upfront costs of drilling new wells.

These costs are considerable. In Alaska, the locations are remote, the climate is extreme, the infrastructure mostly nonexistent, the environmental rules the strictest in the world, and there is only a short work season of three or four months a year. The costs make any project very risky.

Mr. Murkowski’s plan turned into a disaster. It depended much on trust, but it lacked the transparency and predictability needed to win public confidence. One year after it went into effect, the Petroleum Profits Tax brought in far less revenue than expected and the state suffered a revenue crunch.

Somehow, the legislature had never properly defined accounting procedures and permissible deductions — and the deductions came in much higher than expected. Meanwhile, as the shortfall appeared, a number of state legislators were on trial, under indictment, or under investigation for bribery by the FBI. These included some who should have done due diligence for the taxpayer on the proposal they enacted.

As a new governor in 2007, Mrs. Palin stepped in to address the fiscal crisis and restore accountability. Working with Democrats and Republicans alike, she chose a 25% profits tax. But in lean years the state reverts to a 10% gross revenue tax on legacy fields that do not require massive continuing inputs of new capital.

Her plan includes an escalator clause that gives the state a larger share of revenues when oil prices rise. This is common to production-sharing agreements all over the world.

Mr. Obama proposes to give each American a $1,000 check funded by windfall profit taxes to ease the pain of high energy prices. Some say Mrs. Palin’s ACES is like that, because this year every Alaskan will receive a $1,200 check as a share of the oil bonanza. (The check comes in addition to the approximately $2,000 every Alaskan will receive this year as a dividend from the Permanent Fund, which was established by state constitutional amendment in 1976 as a way of sharing the state’s mineral wealth with the people.)

A direct share in oil profits for every citizen is the ultimate incentive for more drilling. That’s why in Alaska drilling for oil seems almost universally popular, while other states are drill-phobic.

The real comparison is not between Mr. Obama’s windfall profit tax and Mrs. Palin’s risk-and-profit-sharing plan. It is between Alaska’s constitutional rule — that the people must share directly in the state’s mineral wealth — and Mr. McCain’s proposal that coastal states should share in federal offshore oil revenue. His plan is for the funds to be used for public purposes like roads, schools and conservation. A share of royalties dramatically improves the coastal states’ incentive to support drilling. But if Mr. McCain offered every individual American a royalty check too, he might find it easier to sell his program.

DinobotPrime on January 19, 2009 at 11:32 PM

Cheaper place to drill like where ?? Canada ? Kuwait ?? Saudi Arabia ?? Where in the US can you drill oil ?? Alaska’s ANWR , forget it . How about Gulf of Mexico , fat chance . How about the Continental shelf , ain’t happening . And in places that they can drill , environmental lawsuits . So in other words, the cheapest way to drill are found in foreign countries . So explain to me why drilling here is more expensive than paying other countries to produce oil for us ??

DinobotPrime on January 19, 2009 at 11:45 PM

Iowandslow

You forget something , unless Exxon drills and extracts the oil , the 40 billion dollars worth of resources is just that , a worthless theoretical exercise that benefits nobody .

DinobotPrime on January 20, 2009 at 12:12 AM