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Legislative Special Session Report
November 27, 2007

The Alaska Legislature convened on Oct. 18, 2007 for a special session called under an executive proclamation issued by the Gov. Sarah Palin on Sept. 4, 2007.

The special session, intended for revisiting the Petroleum Production Tax (PPT) and related subjects, was announced amid indictments, trials and verdicts against several former and current legislators whose alleged misconduct is tied to previous deliberations on the PPT.

Aside from the dramatic allegations and unseemly courtroom evidence, the original PPT legislation pushed by Gov. Frank Murkowski did not shape up to be the revenue source for the state that earlier analysis had predicted.

On Aug. 3, 2007, the Alaska Dept. of Revenue issued a PPT Implementation Status Report that described the PPT's disappointing performance as an unintended consequence, but not beyond correction.

"The new system introduced the added variable of [deductible] costs into the oil revenue equation. While it is a risk that is inherent in the decision to approve a net profit-based tax, the question is whether the magnitude of the risk was fully understood by the legislature given the information provided to them," the report states.

"While costs would be expected to increase, the dramatic difference between what was predicted and what has actually been experienced brings into question whether the legislature made its decisions based upon appropriate information."

The Dept. of Revenue report also noted that the market for tax credits is diminished when oil and gas producers increase their deductable expenses. A lower tax burden for the producers removes their incentive to participate in a tax credit program that helps to capitalize exploration efforts.

"This deficiency is particularly troubling because these new exploration companies are the ones that provide the state with the greatest opportunity to encourage new production that might not otherwise occur."

The special session to reconcile the PPT lasted 4 weeks. The governor submitted companion bills to each chamber (HB2001/SB2001) that contained more than fifty pages of requested changes. Among those changes was a 2.5% increase to the tax on oil and gas and the transfer of GGU positions into exempt service.

Under the original bill, state employees who perform oil tax audits at the Tax Division of the Dept. of Revenue (16 of 17 affected positions in GGU) would join the exempt service, as well as similar positions at the Oil and Gas Audit Section of the Dept. of Natural Resources (6 of 7 affected positions in GGU).

ASEA opposed the transfer of state employees to exempt service and worked with legislators to amend the bill. Exempt service for state workers is appropriate only for positions that are unusually politicized. First, All exempt employees serve at will and have minimal rights in their jobs. Even more problematic is their status as political appointees and their vulnerability to political pressure from management.

Ultimately, HB2001 received the support of both chambers on Nov. 16, 2007 after many changes, including a key amendment to the exempt service language from co-sponsors Mike Hawker (R-Anchorage) and Bill Thomas (R-Haines) in the House Finance Committee. The amendment directed the Dept. and Administration to "develop and implement a distinct classification and compensation plan" for the auditor positions that were at risk of being transferred to exempt service.

On the House floor, Nancy Dahlstrom (R-Eagle River), Kevin Meyer (R-Anchorage) and Les Gara (D-Anchorage) co-sponsored a successful amendment to establish a limited number of new exempt positions for audit masters who will be "employed in a professional capacity to collect oil and gas revenue by developing policy, conducting studies, drafting proposed regulations, enforcing regulations, and directing audits by oil and gas auditors."

As passed, HB2001 establishes a 25% tax on the net value of oil with progressivity of .4% beginning at $30/bbl, provides for retroactive collection of taxes and limits producer deductions to 2006-based rates.

Additionally, producers are prohibited from charging the state for negligence relating to corrosion detection and are prevented from writing off lobbying, advertizing and other costs not related to production.

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