Saturday, July 15, 2017

The latest round of "Don't tax you, don't tax me ..."

Recently we wrote a column built around the famous quote from former U.S. Senate Finance Committee Chairman Russell Long describing his view of the gist of the message regularly delivered by lobbyists and others coming before the Committee.

Long's summation of the message most delivered:  "Don't tax you, don't tax me, tax that fellow behind the tree."  See "To my many friends in the oil industry, I am increasingly repelled ...,"

That same phrase came to mind last night as I read Nat Herz's article on the terms of the "compromise" on HB 111 (the oil tax bill) that purportedly is going before the Senate and House today.  "Alaska House members return to Juneau as hopes rise for an oil tax deal,"

Don't get us wrong.  If the proposal is as Herz describes it, we think the "compromise" -- which largely adopts the Senate's approach -- is good policy.  In the context of global options, the approach should continue to encourage -- or at least, not discourage -- productive investment in Alaska when evaluated by investors against comparable projects elsewhere.  That is an important piece of Alaska's overall economic puzzle.

But that doesn't mean the approach still doesn't smack of "don't tax you"-ish favoritism.

As it has boiled down over the session, extended session and now two special sessions, the core of the disagreement between the House and Senate over the bill relates to the "replace" portion of the "repeal and replace" approach to what has come to be called "cashable oil credits." The Senate has proposed to replace the credits with a provision that permits producers to deduct 35% of the costs they incur prior to first oil in calculating their subsequent production taxes. For successful projects -- i.e., those that reach first oil -- that amounts with some delay to the same rate at which they would have been paid cashable credits.

In the midst of some other bells and whistles, the House has proposed 25%.

According to Herz's article, "The deal on the table appears to be largely in line with an earlier offer from Kelly's Republican-led Senate majority, which has favored replacing the system of cash payments with one that allows companies to earn tax deductions at the same rate — 35 percent of losses."

The reason that smacks of "don't tax you"?  Because the Senate held the line firmly when it came to dealing with oil taxes.  The approach there? "Don't tax you (the oil industry)."

That is a far different approach than they (and to a lesser extent, the House) have taken when it comes to middle (including upper middle) and lower income Alaska families.  There, the approach has been "tax that guy behind the tree."  And not just by a little.  The Senate's proposed reduction (i.e., tax) on the PFD, which forms a not immaterial share of the overall income of those Alaska families, is a staggering 50%.

Some will try to defend the different treatment by arguing that oil production is vital to the Alaska economy, and thus, because taxes play a role in driving investment (that in turn drives production), treading softly on changes to oil taxes is important to the state's overall economic health.

But guess what? The same is true of the PFD.  According to ISER's March 2016 study, cutting the PFD has the largest adverse impact on overall Alaska income of all the fiscal options available to government, and the largest adverse impact on both income and jobs of any of the so-called "new revenue" options.

Yet, that step -- with its attendant costs to the overall Alaska economy -- is the first lever the Senate has proposed to pull as it (finally) starts to deal with the state's fiscal situation.  And they have proposed to pull it extremely hard, after including the multiplier effect reducing overall Alaska income in the aggregate by nearly $1 billion (out of only a $40 billion economy) in one fell swoop.

As a result, frankly it's disingenuous for the Senate or anyone else to try to distinguish their position on oil taxes on the basis of economic harm.  If they truly cared about the overall economy, they wouldn't be taxing the PFD either -- at least, not anywhere near to the extent they have proposed.

Instead, what this demonstrates simply is that the Senate (and again, to a lesser extent, the House) cares only about protecting some parts of the economy -- in this case it is the oil industry and its hangers on -- rather than the overall economy or the Alaska families that form the core of it.

For them, the proposed approach still remains "tax that guy behind the tree."

As we have said repeatedly on these pages, we don't believe any of these "tax and spend" programs are necessary. Instead, we believe using the Hammond 50/50 approach Alaska is well positioned to ride out the current low in the oil price cycle without self-inflicting any further damage on its economy. See "The Special Session version of “Implementing Governor Hammond’s 50/50 Plan,"

But, as we also have said repeatedly if we nevertheless are headed down this road it should be done with the least damage and disproportionate effects possible. We believe that replacing both the Senate and House proposals (both the PFD cut and income tax components) with a single flat tax -- a tax that imposes an equal distributional burden regardless of income class -- does exactly that.

That approach doesn't leave any one part of the overall Alaska economy -- or any one segment of Alaska families -- "behind the tree." It treats all the same.