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Friday, August 29, 2008

Don't be misled into thinking that Gov. Palin has championed the same sort of "windfall profits taxes" on oil companies that Obama has

Stephen Spruiell was generous and self-critical enough to link today on The Corner a comment I wrote to one of my own Palin posts in which I took issue with a post by my excellent friend Ed Morrissey (formerly of Captain's Quarters) at Hot Air. Basically, I thought Ed (and, inferentially, Mr. Spruiell) had been taken in by a hatchet job from a Seattle newspaper which was carefully calculated to argue that Sarah Palin is a fan of windfall profits taxes on oil companies, just like Barack Obama.

That's not so. Palin has stood up to the major oil companies, and has made utterly transparent the State of Alaska's dealings with them, but she is neither in their pocket nor a rabble-rouser who unfairly demonizes them. She's dealt with them like a responsible public servant, not a class warrior. I'll reprint here the comment Mr. Spruiell kindly referenced, along with a subsequent one on the same post describing my emails to Ed (again, without blockquotes, and with slight editing):


What the article you linked to is discussing is a severance tax. State severance taxes charged on production of oil and gas and minerals are common throughout the United States. Also sometimes called "production taxes," they're charged by the state from beneath whose land valuable resources are extracted, and they're designed not to punish the energy companies, but to recompense the state for its loss of a non-replaceable resource — one that must be quantified and taxed upon removal, if it is ever to be taxed at all. Severance taxes are therefore based on production from within the state, not on profits earned by the company extracting that production — even though the production may be measured in, and the tax assessed upon, the market value or gross revenues (as measured in dollars) received for that production, rather than an "in kind" delivery to the state in barrels or cubic feet as such. See, e.g., Tex. Tax Code §§ 201.051 & 202.051 (Texas production taxes on gas and oil respectively).

Indeed, I once represented Conoco in a Houston lawsuit against Mobil over how to allocate the severance tax they jointly owed based on jointly owned oil and gas leases in Idaho. There's actually a fair amount of competing case-law from different states over whether severance taxes are more properly characterized as "property taxes" or "income taxes" — if for some reason (e.g., interpreting a sloppy contract) you have to put them into one of those two categories or the other. But in any event, severance taxes are in no way premised on the notion that energy companies are making unconscionable or excessive profits.

Alaska's previous version of its severance tax had been negotiated behind closed doors by defeated Gov. Frank Murkowski, a few top state legislators (some of whom are now in prison for corruption), and energy lobbyists. One of the campaign planks upon which Gov. Palin ran for office was replacing that tax with one negotiated in the open with full transparency; and the resulting tax was, indeed, slightly more favorable to the State of Alaska. The article you linked tells some of this anti-corruption history on the part of Gov. Palin. But just because the newspaper headline writers and some of the people the article quoted used the word "windfall," don't be fooled into thinking that the tax in question is the same thing Barack Obama and the Democrats are now promoting at a national level.

Rather, what Obama and the Dems are promoting is nothing less than selective government confiscation of the property of a particular industry, on the theory that such industry's profits are "excessive." That's a repugnant rabble-rousing scheme, populism turned into class warfare and carried to its excessive worst. It's completely unjustifiable either morally or economically. Its short-term victims are going to be energy-company shareholders (which include huge numbers of pension plans in which ordinary Americans have investments), but its long-term victims will be all Americans (who will suffer as our own energy companies are put at an increasing competitive disadvantage compared to others in the world, and whose national security interests will be further harmed as we become even more dependent on foreign sources of fossil-fuel energy).


I hadn't seen Cap'n Ed's post at Hot Air, but I've sent him the following email:


I’m pretty sure your post on Gov. Palin supposedly having supported a “windfall profits” tax in Alaska is badly misinformed. I think you’ve been suckered by taking the Seattle newspaper article at face value. I would not be surprised if this article is a plant by Dems who are terrified that McCain MIGHT pick Palin.

The tax in question is Alaska’s SEVERANCE tax, which is not a general corporate income tax, but a one-time tax that most states impose on the extraction of non-renewable resources that otherwise would escape taxation. I’m not an expert on tax law, but I have had a prior case involving state severance taxes, and I discuss the difference in a comment on my blog: link.

You also need to understand the context: The prior severance tax was negotiated behind closed doors between the three big oil companies who (to the exclusion of others) dominate existing production — ExxonMobil, BP, and ConocoPhillips — and the corrupt former legislators (some of whom are now in prison) and discredited administration of former Gov. Frank Murkowski (whom Palin defeated). Palin insisted on renegotiating the severance tax in open meetings with complete transparency. The result was indeed a slight increase — but only from a base rate of 22.5% to 25%. link

In other words, Palin brought SUNSHINE to the process. That did indeed upset those three big oil companies, who were happier in the dark. They’re also pissed because she’s championing an open-bidding process for a new natural gas pipeline that will bring affordable energy to Alaskans as well as making its natural gas reserves eventually available to the lower 48 states. (A Canadian-based company won that bid after ExxonMobil, BP, and ConocoPhillips refused to participate, but they’re promoting their own alternative deal. The Alaska legislature’s in special session to sort things out.)

Gov. Palin’s constituents, however, follow this stuff closely because it is so integral to the state’s entire budget and governing processes. Gov. Palin’s approval ratings are still at 80% as of the end of July.

The quote adding in royalty payments to the tax burden is extremely misleading. Producers pay royalty payments wherever they extract oil, gas & minerals. If you check, I think you’ll find that the royalty payments actually go to the federal government, not the Alaska state government, under the terms of the deal reached when Alaska became a state.

Costs of living are dramatically higher in Alaska than elsewhere. The local state tax burden is already comparatively low, however. Because of current energy prices — not specifically because of this modest increase in the severance tax — Alaska is in a position to rebate government money to its citizens. They’re choosing to do so by direct payments rather than cutting taxes. But since their entire state budget is already (and has long been) based on the development of Alaska’s energy reserves, it’s not at all fair to compare that rebate program to the confiscate-and-giveaway class warfare that Obama is proposing.

I write this to encourage you to actually research this more thoroughly, perhaps by contacting someone who IS a state tax expert and knows the state history better than I do. I don’t have time to do a more thorough analysis today or tomorrow, but if you choose not to, I’ll try to do so later this week. If you want to quote (with or without attribution) anything from this email in the meantime, feel free, but please be sure to include my statement that this is a “top of my head” reaction.

- Beldar

And I followed that with this email:


Re-reading what I just sent, I’m particularly uncertain about royalty rights. It may be that they’re divided in some proportion between the state and federal governments. So that paragraph in particular probably ought not be quoted without some further inquiry. But it is fair to say that oil companies pay royalties to SOMEONE on essentially all production, and it’s not fair to characterize those royalties as being part of anyone’s “windfall profits tax.”

- Beldar

What's next is from the description from the universally respected CCH looseleaf tax service, as linked in my first email, of the legislation in question:

The base tax rate is increased from 22.5% to 25% of the annual production tax value of taxable oil and gas. When a producer's average monthly production tax value per BTU equivalent barrel of taxable oil and gas is between $30 and $92.50, an additional tax of 0.4% is imposed on the difference between the average monthly production tax value and $30. Formerly, the additional tax was 0.25%. When a producer's average monthly production tax value exceeds $92.50, the additional tax is 0.1% of the difference between the monthly production tax value and $92.50. The new tax rates are effective July 1, 2007.

That's not remotely consistent with what the Seattle newspaper article says, but I'd put my money on CCH.

Posted by Beldar at 07:28 PM in 2008 Election, Energy, Law (2008), McCain, Palin, Politics (2008) | Permalink


Other weblog posts, if any, whose authors have linked to Don't be misled into thinking that Gov. Palin has championed the same sort of "windfall profits taxes" on oil companies that Obama has and sent a trackback ping are listed here:

» POLITICS: More Than Just The Mayor from Baseball Crank

Tracked on Sep 2, 2008 11:01:29 PM

» POLITICS: The Integrity Gap, Part I of III: Gov. Sarah Palin from Baseball Crank

Tracked on Oct 2, 2008 2:19:06 PM


(1) capitano made the following comment | Aug 29, 2008 9:11:15 PM | Permalink

Thanks for the explanation. It makes sense given her overall political philosophy which didn't square with a sour note like windfall profits.

(2) Aakash made the following comment | Sep 3, 2008 3:23:11 PM | Permalink

Thank you for providing us with this informed overview and explanation, based upon your legal background. The more I find out about Governor Palin's past, the more appealing she becomes!

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