Oil companies are now committing massive investments to Alaska’s economy in response to reduced taxes. Conservatives have long claimed that reductions in taxes help to encourage market investment and prosperity. Without business, there are no jobs, without jobs there cannot be economic growth. The situation concerning the Oil and Gas Production Tax (SB 21) in the North Slope of Alaska is a prime example of this truism. The Tax Foundation ranked Alaska as the fourth-best state tax climate for business for 2013, and the prospects keep improving as this new law begins to take effect. The long-standing fact that Alaska is one of only two states without an individual income tax or state-level sales tax (the other being New Hampshire) greatly contributes to its favorable business climate.
Before SB 21, the task of funding state services and government fell mainly to the oil companies, which paid a progressive tax on net profit with a maximum of 75 percent being collected by the state as part of the 2007 Alaska’s Clear and Equitable Share (ACES) Act. This staggering burden upon oil producers, who bring so much investment to the state, was advocated and pushed through by then Governor Sarah Palin. It is ironic that this national icon for lower taxes touts ACES as one of her major accomplishments in office.
For the past three years, Governor Sean Parnell has pushed for the rollback of this tax and finally succeeded with the passage of SB 21 this past April. In response to this reversal, which now sets a flat 35 percent tax on profits, BP has announced plans to invest $1 billion in further investment into Prudhoe Bay in Alaska, which BP lists as the largest oilfield in the United States. BP’s promise to create two new drill rigs by 2016 will add 200 new jobs to the already 2,300 that they support in Alaska. Exxon and ConocoPhillips, which each own 36 percent of the Prudhoe Bay oilfield, are looking into plans to team up with BP to commit $3 billion to add 110 more wells to their portfolios.
A look at the past shows that while some may criticize this tax reduction as a “giveaway” to big oil, it is far from that. Alaska is able to enjoy low taxes due to the finances that BP, ConocoPhillips, and Exxon invest in the state. Too often the oil industry is seen as easy plunder for tax hiking politicians, however, the tax reductions were essential for the industry and economic prosperity in the state. Currently, the oil flow from existing rigs is waning and low capacity is threatening to render the pipeline inoperable. The miles of pipeline were built to transport 2 million barrels of crude oil a day—the amount that was being transported at the height of production. A severe cut to the oil flow could cause remaining oil to freeze. Without oil companies’ additional and substantial investment it is likely that the Alaskan economy would fail to thrive. Rather than push policies which would make exploration in Alaska less lucrative than pursuing oil elsewhere, the latest actions from Governor Parnell have already been shown to foster continued economic development. So while the rest of the nation remains confounded on how to resurrect the economy, let them look to the North as lowered taxes spur investment and growth.