Saturday, May 05, 2007

AGIA: What's it all about and who really wins

As everyone knows in Alaska, oil money runs this state. It is used to fund education, capital projects, social programs, police and fire protection and overall government to include public employee pensions.

Alaska gets its money to fund government through taxes, Oil taxes.

The subject of taxes is written into Alaska's Constitution.

Article 9 - Finance and Taxation

§ 1. Taxing Power

The power of taxation shall never be surrendered. This power shall not be suspended or contracted away, except as provided in this article.

In the Constitutional Convention minutes you will find this clarification on what the farmers had in mind when it came to suspending taxes.

KILCHER: Thank you. Then in Section 1, a similar question, in the second line, the power "shall never be suspended or contracted." Could you consider that the power of taxation -- could you consider that taxes could be suspended, taxes applying to farms as a part of an integral industry? NERLAND: I would suspect that if all farms in the Territory were so included, that perhaps they could be.KILCHER: Yes, that's what I had in mind. Thank you.

I wrote about the subject back in June of last year on this blog. It can be found here:

And as such, there is an exemption clause to taxation:

§ 4. Exemptions

The real and personal property of the State or its political subdivisions shall be exempt from taxation under conditions and exceptions which may be provided by law. All, or any portion of, property used exclusively for non-profit religious, charitable, cemetery, or educational purposes, as defined by law, shall be exempt from taxation. Other exemptions of like or different kind may be granted by general law. All valid existing exemptions shall be retained until otherwise provided by law

So as hinted at by the framers for the good of Alaska and the development of an industry, taxes could be suspended. There can be much debate on what the term suspension means. Does it mean you cannot suspend the right to tax in a general law?

Logic says that since you can suspend taxing someone as is done with churches and schools, you can suspend taxing the oil companies. The exemption clause clearly links the two together when the verbiage discusses property taxes and other exemptions of "like or different kind may be granted by general law."

And as was stated by Kilcher, that was the intent when suspending taxes on farms. Remember back then, farms where a source of industry early on in the state and the framers felt that the suspension of taxes would let the industry grow in Alaska.

It is with basis in constitutional law, a general statutory law is written and can or must follow this line of thinking. For those who say taxes cannot be suspended, history has shown that they are and even today, taxes are suspended.

So it is with this foundation in constitutional doctrine, the Alaska Gas Inducement Act (AGIA) can be written.
AGIA What's it all about?
Getting a gas pipeline. That is the bottom line. There are those who have criticized Governor Palin in her efforts and there are those who are offering praise. What has to be done is take away all of the rhetoric from both sides and focus on what is needed to get a gas pipeline to be built.
Constitutional doctrine says this: you can suspend taxes. Should AGIA do that? No. It should tax the oil companies/pipeline builders at a competitive rate. A rate that is competitive with countries that are developing oil and where the industry is growing not shrinking.
There has been the argument by certain Legislators that we should look at countries like Venezuela as a point of reference for taxation. This is the reality, in those countries that have high taxation, the production has decreased. As is in the case of Venezuela.
Back in April of 2006, Venezuela had to buy oil from Russia to keep from defaulting on contracts. I wrote about the issue here:
Production there has declined 60%. If you factor in all of the oil companies that are nationalized which is the majority, production has decreased worldwide and thus we have the high prices.
Private oil companies make up a small percentage of the oil production but get the lions share of negative news for making profits. that underlying sentiment finds its way into our own laws and our own Legislator's minds.
And that sentiment is the underlying basis for either failure to get a gas line or success under AGIA.
Legislators should be looking at Russia and Canada as an example of what to do. The two countries are competing in the world markets. And both are seeing oil production increasing in their countries. Taxation is the key to the increase. Canada has decreased its taxation as has Russia.
For instance: The Sakahlin II field that is being developed in Russia. Sakhalin Energy with a consortium with Shell Oil, signed a contract with Gazprom and Russia that gave Shell a lucerative deal.
Shell gets their investment paid back before Russia get any taxes. The tax rate is 32% and a 6% royalty. Compare that with what is being suggested here in Alaska and the combination of all taxes and royalties far exceed what Shell is paying in Russia or Canada.
Interestingly, Russia went to a PPT. The same system that Alaska went to. But Alaska is a state, not a country and unfortunately, the PPT can only work at the federal or national level.
That is because at that level, the federal tax comes first. If the federal government would have implemented the federal windfall tax as was being suggested by some Democrats, that tax would have taken from the profits, and as such, it would have reduced revenue to the State of Alaska.
The point here is very clear. There must be a tax rate with a long term certainty built in that competes with countries that are developing their resources agressively.
AGIA, the down and dirty basics:
to be continued...........................................

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