ACES is broken. It's time to fix it.
Alaska's Clear & Equitable Share, or "ACES," is the oil and gas production tax law enacted in late 2007 and imposed retroactively. However, it is neither clear nor equitable, and state government's "share" has come at the expense of private sector growth - jobs and business opportunities for Alaskans.
It has created uncertainty for taxpayers, a nonsensical tax system that penalizes production from large fields and an unfriendly investment climate.
ACES was the third and largest production tax increase in a 3-year period - a multibillion-dollar tax hike that gives Alaska the dubious distinction of being the state with the highest taxes on the energy industry and was described by Bradner's Legislative Digest as "staggering."
It increased production taxes by 50% from 2007 and 350% from 2006 based on an $80/barrel market price, and includes an aggressive "progressivity" formula that boosts the tax rate as oil prices increase.
There are other counterproductive provisions as well, such as unreasonable restrictions on allowable deductions for investments and giving the Department of Revenue unprecedented discretion in making and applying rules. Now, more than two years after its adoption, ACES regulations are still being drafted. This causes further confusion for taxpayers.
At current prices of about $80/barrel, the production tax alone is 40% of net revenues, and the total government take is 70% (including state royalties, production tax, state income tax, state property tax, local property taxes and federal income tax).
Even at current prices, government takes more than two-thirds of the net revenues from oil production, leaving less than a third for private companies that take the investment risks and create jobs and business opportunities for Alaskans through reinvestment.
At high oil prices, production tax rates can reach 75%, and total government take on each additional $1 in price can exceed 90%. This virtually eliminates the upside of investments, gives oil companies little incentive to incur the risks inherent in development and puts Alaska at a significant competitive disadvantage with other oil and gas regions where companies can invest.
As predicted two years ago, ACES has stifled oil industry investment while fueling growth in state government spending and employment. From October 2007 to October 2009, according to State of Alaska data, state government employment has increased by more than 1,000 (4%) - from 25,300 to 26,400.
Key points to consider:
- Capital spending by Alaska's major oil producers and investors is declining, and a disproportionate share of spending is going toward maintenance projects that do nothing to generate new oil production.
- This winter, there will be greatly reduced exploratory drilling on the North Slope. It's the first time in more than 40 years that the state's most active explorer, ConocoPhillips, won't be drilling an exploratory well.
- North Slope oil production is declining at a rate of 5-6% annually, down 100,000 barrels since 2007, the year ACES was enacted. The pipeline is operating at less than a third of capacity, resulting in operational challenges that will only become more formidable over time.
- Hundreds of Alaskans already have lost work, wages and business due to oil industry spending reductions. Thousands more are at risk.
