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Stones & Bones / energy / volume 13 number 5, May/June 2011 DOSE OF REALITY In Part 1 of A Citizen’s Look at Oil Taxation, I looked at some of the false claims and misleading statements the astroturf organization Make Alaska Competitive Coalition has made in an effort to convince us that our levies on North Slope oil are too high compared to that of other countries. Supposedly, those claimed high prices are causing the oil companies to curtail their investment in Alaska, or even leave. It takes some unethical subterfuge to make this claim, which really is false. The way to determine if Alaska’s price for selling its oil is too high is to compare our price with that of other government-owned oil provinces. The standard measure used in such comparisons is called Government Take. By definition, Government Take is the percent of the net profit coming from oil that goes to government, and net profit is the value of the oil after deducting all costs of getting it to market on the US West Coast. Those costs are the capital cost of exploration, the cost of production, cost of transportation, production taxes, and corporate income taxes, all adjusted for any incentive bonuses or tax rebates. That’s quite a list of what goes into determining what has to be deducted from the selling price to obtain the net value of a barrel of oil. Some of the things on the list are difficult or nearly impossible to learn because of proprietary and income tax privacy considerations; others are fairly easy to find out. Lists of Government Takes have been published and among them is the one shown in my first diagram, originally constructed by Daniel Johnston in 2008.
There we see that the Government Take at various locations around the world runs from a low of less than 30 percent to over 90 percent, and that the world average is 65 percent. Note that during the period our ACES (Alaska’s Clear and Equitable Share) legislation has been in effect starting in 2007, the Total (federal + Alaska) Government Take for Alaska oil has straddled the worldwide average, running from 56.3 percent to 68.5 percent, according to available data from ConocoPhillips operations in Alaska, which I assume to hold for other major North Slope producers as well. Thus, under ACES the Total Government Take has been about average, and much lower than in various other provinces having major oil deposits such as Venezuela, Libya, and Iran. To reiterate just for emphasis: The real, factual, data-based Total Government Take for Alaska under ACES has been 56 to 69 percent, near the worldwide average, and less to far less than in at least twenty other major oil provinces shown on the diagram. However, if we go to the Make Alaska Competitive Coalition web page (www.makealaskacompetitive.com) we find the statement:
We already know that we need to be skeptical of anything the Make Alaska Competitive Coalition says, and here is another statement deserving skepticism. As seen above, Alaska’s oil and gas taxes are not “some of the highest in the world;” they are near the worldwide average. But as we saw in Part 1 of this series, the Make Alaska Competitive Coalition has no qualms about making false statements. Nor does it bother this astroturfing organization to craft devious half-truthful statements in hopes of deceiving the Alaska public and its legislature. That has been done here by slipping into the statement the term “marginal tax rate” and implying it is the same thing as Government Take. This bit of trickery requires discussion to demonstrate the differences and similarities between Government Take and Marginal Tax Rate, sometimes also called Marginal Government Take. Recall that Government Take is a measure of the sharing of oil profits between governments and producers—it is the magnitude (size) of the government share expressed as a percentage of the net profit. It follows that the Company Take is 100 percent minus the Total Government Take. So, since the worldwide average Total Government Take is 65 percent, the worldwide average Company Take is 35 percent. For getting the oil out of the ground and to market, the oil companies, on average, receive 35 percent of the net profit, and the government owners of the oil receive 65 percent. Marginal Tax Rate (or Marginal Government Take) is a different concept in that it measures not the magnitude of government income, but rather how that income changes with the price of oil. The definition of Marginal Tax Rate can be expressed by the statement: When the price of oil varies by a dollar, the Marginal Tax Rate describes how much of that variation is attributed to change in government income. Thus, if the Marginal Tax Rate is 80 percent it means that when the price of oil drops by one dollar the government income share of that decline is 80 cents, and the oil company share of the decline is 20 cents. Similarly, if the price rises by one dollar, the government share of that increase is 80 cents and the oil company gains 20 cents. To calculate Marginal Tax Rate at some oil price P we need to know the Government Take at that price and also the Take at price P +$1 as well as the net value of oil at P. The Marginal Tax Rate is simply the Government Take at P + 1 times the oil net value at P + 1 minus the Government Take at price P times the net value at P. Minor manipulation of this expression shows that if the Government Take at price P + 1 is the same as at P then the Marginal Tax Rate is numerically equal to the Government Take. That equality does not hold when we look at the Marginal Tax Rate for Alaska because the ACES levy is progressive. Except at very low oil prices, the Government Take at price P + 1 is always higher than at price P, so the Marginal Tax Rate and the Government Take will differ, as is seen in the second diagram, below:
In this diagram the dashed curve depicts the calculated Marginal Tax Rate drawn assuming a combined federal and state income tax rate of 41 percent on net profit. Under current law, that is the maximum possible combined income tax allowed. It is the one that peaks at 93 percent when the world price of oil is near $125/bbl—the basis for the Coalition’s false claim that our Government Take is one of the highest in the world. As we have already seen, under ACES the Total Government Take for Alaska oil is midrange at prices so far pertaining. In addition to the curve showing Marginal Tax Rate are four other curves depicting various forms of Government Take. The bottom curve labeled “Effective ACES Take” is provided by the Alaska Department of Revenue based on the department’s information regarding incentive and other adjustments applied to the basic ACES levy, frequently referred to as a production tax. This curve shows that the adjusted ACES income to Alaska is nil at oil price below $40/bbl and rises to near 40 percent at price $130. (DOR ACES Status Report Jan. 14, 2010, 15 pages, available on line at: www.revenue.state.ak.us/1-14-10%20ACES%20Status%20Report%20final2%20(3).pdf) Adding the 13-percent royalty take to the effective ACES take results in the curve labeled “Effective Pre-Income tax Alaska Govt. Take” which describes the pre-income tax income to Alaska, ranging from about 12 percent at $40/bbl to about 50 percent at $130/bbl. In order to get the Total Alaska Government Take it is necessary to add in the state corporate income tax of 9.5 percent which then results in the curve labeled Alaska Government Take, ranging from about 20 percent at $40/bbl to about 58 percent at $130/bbl. To arrive at the Total Government Take, the federal take must be added to the Alaska take, and according to data available from ConocoPhillips this addition raises the take roughly another 20 percent to the curve labeled “Estimated Total Government Take.” The placement of the curve is mainly dictated by information contained in the four squares showing the actual average Total Government Take from ConocoPhillips’ operations during each of the years shown, 2007 to 2010. By examining these take curves we can see how sharing of net profits resulting from North Slope oil changes as the price of oil varies. At $40/bbl the net value is only about $15, so Alaska’s income is about $3.15, the federal income is about $3.45, and the oil company net income $8.40. At $100/bbl the net value is about $75 of which Alaska receives about 48 percent or $36, the federal government gets about 20 percent, or $15, and the company take of 32 percent yields $24. At a world price of $120 near where the Marginal Tax Rate peaks at 93 percent, the net value of oil is $95/bbl. So Alaska’s take of about 58 percent brings in $55, the federal government gets about $20, and the oil companies about $21. Notice that all this information on oil income is obtained simply from multiplying the net value of oil by the Government Take percentage. The concept is useful not only for comparing Alaska’s competitiveness with other oil provinces, but also for seeing by what routes Alaska’s income arrives in state coffers. By viewing the second diagram here we have seen how much money arrives from the ACES production levy adjusted for incentives, that money coming from royalty, and how much from income taxes. By contrast, the Marginal Tax Rate index tells us nothing other than how Government Take varies with the price of oil. It is not obvious to me what value Marginal Tax Rate has other than for purposes of obscuring reality, as the Make Alaska Competitive Coalition is trying to do. It is not the only guilty party; some people testifying before the Legislature have also employed this questionable index in their attempts to convince the members to vote for lowering the ACES levy. The proponents of lowering the ACES levy seem to have succeeded with a slight majority of the Alaska House, but so far the Senate has not gone along with this deceitful ploy. There is much more to be said about our ACES levy, but our Esteemed Editor says that’s enuf for now; maybe more next time. As you may have noted, this is a complex topic, not easy for we non-specialists to understand. I’ve been digging into it for about two months, and I’m not sure I understand it all yet. However, one thing is now clear to me: much confusion and misleading information has come from lack of understanding of the difference between Government Take and Marginal Tax Rate—worse yet by the equating of the two in discussions and on diagrams presented to our legislature. The main points to carry away:
The Alaska Senate did the right thing by holding off on altering ACES until compelling evidence for change is available. At the moment, it looks to me that the ACES levy is too low at low oil prices, but might be too high if oil prices rise dramatically above current levels. Neil Davis is a retired geophysicist and author of several fiction and nonfiction books. His most recent book is The Painting on the Window Blind: The Story of an Unknown Artist and a Daring Union Spy. Neil can be contacted at neildavs@mosquitonet.com. | ||
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