Monday, May 12, 2014

Two things unsaid, one that was during my debate on SB 21 with Vic Fischer ...

Two Saturdays ago (May 3) I had the privilege of debating Vote Yes on 1 Chairman -- and Alaska senior statesman -- Vic Fischer before this year's Leadership Anchorage cohort about the upcoming referendum on SB 21.  It was an honor to share the podium with Vic.

The debate was notable from my perspective because of two things that weren't said, and one that was while Vic was making the case for repealing SB 21.  

The first thing left unsaid, for the first time in any debate about SB 21 in which I have participated or listened, was any reference to a so-called "$2 billion giveaway" which supposedly has resulted from the passage of SB 21.  While a central theme in previous debates -- including my previous debate with Dr. Stephen Haycox -- it simply didn't come up in this one.

As most of readers of these pages will know, the supposed "$2 billion giveaway" is taken from the drop in forecasted state oil revenues for FY 2014 between the revenue outlooks published in the fall of 2012 and 2013, the ones immediately prior to and following the passage of SB 21.  However, on  May 1, two days before Saturday's debate, Dr. Scott Goldsmith of the University of Alaska - Anchorage's Institute of Social and Economic Research (ISER) released a report that concluded after detailed analysis only "[a]bout 4% of the $2.1 billion drop in the fall oil revenue forecast for 2014 is due to the new tax."  Four percent of $2 billion is $80 million, not $2 billion.  

And as Dr. Goldsmith's report goes on to explain, that essentially is a down payment on achieving a larger payday for the state.  Another conclusion of the report,
The tax change, combined with a modest increase in new production, would produce higher revenues under a reasonable range of assumptions about oil prices and production costs. New investment would drive up tax deductible costs in the short run—reducing production taxes—but that loss would be more than offset in later years by additional production tax and royalty revenues from new production, even at a lower average tax rate.
 In short, Dr. Goldsmith's report effectively busts the myth of the supposed "$2 billion [or even $80 million, as some subsequently tried to argue] giveaway."  Hopefully the absence of the discussion at the Leadership Anchorage debate is a sign that we have moved on from that point and can focus on the future, not the past.

The second thing left unsaid at the debate was any mention of a "guarantee."  Again as most readers of these pages will know, that has been a major talking point in the past among those urging the repeal of SB 21.  The argument has been the state should agree to lower the tax rates provided under ACES only if the producers provide "guarantees" about future levels of investment.

The problem with that argument, however, is that the state is unwilling -- and some even argue unable -- to make the same guarantee regarding future tax rates.  As a result, investors rightfully are concerned about the potential for a bait and switch, where they make the significant front end investments required to expand their development efforts, and then the state changes the tax structure again to capture the resulting benefits just as the investors are expecting to realize the profits on which those investments were based.

Demanding "guarantees" in such a one-sided circumstance doesn't work.  As they do in the remainder of the world where the government reserves the right to change policy midstream, investors understandably expect to reserve the right to factor the potential for future changes in government take into their ongoing investment decisions and pursue alternative options if they offer better potential returns.  Demanding one-sided "guarantees" about investment decisions simply means no investment.

It was good to learn that perhaps we have moved on from that issue as well.

The thing that was said that I had not expected was Vic's statement that the proponents of the referendum are not seeking to return the state's tax structure to ACES.  Instead, Vic's vision is that the repeal will result in returning the issue to the legislature, which will then readdress the issue and come up with a "better, more fair" tax plan.

I am more than a little perplexed by this argument.  If the goal is simply to change the tax law to a third option -- something that is not ACES and not SB 21 -- then why are we going through the referendum?

Like any tax code, SB 21 is not set in stone and can be changed by a subsequent legislature.  If the proponents are dissatisfied with the law as it is -- and also as it would be if the referendum succeeded -- why not simply focus on changing the law in the next session to what they want it to be rather than going through the intervening step of reverting back to ACES, an approach that apparently, now, no one favors.

Vic's answer basically is that the referendum is still important as a means of "sending a message" and hitting a reset button on tax reform that, hopefully in his view, will produce a "better" result next time.  (I must admit for a moment while he spoke to having a vision dancing through my head of a roulette wheel, producing an infinite number of different -- and unpredictable -- results.)

But doing so runs several risks.

First, starting over creates the potential that the state will be unable to reach consensus on a replacement, as happened during the 27th (2010-2012) Legislature, with the effect that ACES, which apparently both proponents and opponents of the referendum now agree doesn't work, will remain in effect indefinitely, leading to a renewed stagnation in productive investment for yet another series of years.

Second, it creates the risk to proponents that the state will be no better off from their perspective at the conclusion of their efforts than it was at the beginning.  Unlike initiatives -- the passage of positive law by public vote -- there is no prohibition in the Constitution on a subsequent legislature immediately reenacting most, or even all, of a law repealed by referendum.  If the proponents truly want to move to a third option, then the appropriate way to do that would be to put that third option on the ballot as an initiative.  Under the Constitution (Art. 11, Sec. 6), the resulting law would stay on the books for at least two years.

Third, in an increasingly dynamic investment world, starting over creates the potential that at least some investors will just give up on Alaska, concluding that the political risks of achieving long term stability in the state are just too great and that, given the divide that exists -- and much more importantly, the fiscal cliff that is fast approaching -- any tax regime is likely to be short-lived and unlikely to survive long enough to justify the type of long-term investments Alaska requires to develop its already economically-challenged resource base.

In short, I simply don't understand why we are going down this road if even the proponents no longer believe in the law that would result from their success.

But, as I said at the outset, it was an honor to share the podium with Vic.  Unlike in some debates there was no vote taken at the end, so there is no way of measuring the impact on the audience.  Jack Roderick, a Yes on 1 proponent and someone, though we disagree about this effort, I hugely respect and who was at both, said at the end I was "more slick" this time than during the debate Steve Haycox.  But maybe he simply meant that this time, unlike last, I avoided spilling water over all my papers mid-debate.

For those that follow these things, as in the previous debate I used a one-page handout to help illustrate my points as we talked.  The handout is available here.