What Really Happens When You Cut Taxes On Oil Companies

by Jeff Spross Posted on December 5, 2014 at 11:53 am Updated: December 5, 2014 at 3:00 pm

Tax cuts are often spoken of as an unalloyed good in American politics. But the state of Alaska is learning the hard way those cuts — especially when they are for taxes on oil companies — can come back to bite you.

Alaska is the only state with neither a state income tax nor a state sales tax. For revenue, it relies entirely on federal funding and various taxes on oil production in the state. Back in 2013, the oil taxes were cut by legislation passed under former Governor Sean Parnell (R). The logic of the cut was that it would spur renewed oil industry activity in the state, but that expected economic ferment has not materialized. And now, as the price of oil drops lower and lower, taking Alaska’s remaining tax revenue down with it, those cuts are leaving Alaska’s state budget deep in the red.

“[I]n recent years taxes on oil production have covered more than half the total budget ($13.5 billion including federal funds and capital projects) and 90 percent of the state’s discretionary spending ($6.5 billion to run agencies and schools),” the Washington Post reported on Wednesday. “Now, with prices under $70 a barrel, the budget deficit could balloon to more than $3 billion, about half of the state’s discretionary spending level.”

Newly-installed Governor Bill Walker — an independent who quit the Republican Party to run a joint-ticket campaign with Alaska’s Democrats in the recent midterm elections — supported a referendum to undo the tax cut, but it was narrowly defeated by voters back in August. Walker also supported taking up the expansion of Medicaid — the joint federal-state health insurance program for the poor — that’s on offer under the Affordable Care Act. Parnell had resisted the move, citing cost concerns.

In November, Walker told the Alaska Dispatch News that “he doesn’t plan to offer changes to the tax structure this session. But he plans to monitor whether the tax is having the desired effect of more oil in the pipeline and increased industry investment.”

According to previous reporting from the Dispatch News, oil production in Alaska has actually been slowly declining ever since the late 1980s, when it peaked at 2 million barrels per day. Advocates for the oil tax cut had insisted the policy change would reverse that trend. But new state projections at the start of 2014 anticipated a continued decline to 312,000 barrels per day by the end of the decade, from 531,000 barrels per day in 2013.

In a way, Alaska’s tax cut was an attempt to fight forces far bigger than the state or its policymakers could possibly control. Since oil from Alaska works just as well as oil from Russia, the Middle East, or Venezuela, the price of oil is determined by the global market. And the fact is, global oil production has not been able to keep pace with the growth in global demand for sometime.

There can be blips like the current price drop, thanks to things like the North American boom in shale production, or decisions by the Organization of the Petroleum Exporting Countries — a cooperative organization and economic cartel of Middle Eastern, South American, and African states — to flood the market with supply to move prices. But oil is a physical resource, and there’s only so much of it under the ground, and supplies will inevitably become ever more difficult and expensive to maintain. Meanwhile, enormous populations in China and India especially are attempting a mass movement into the global middle class — and unless the world can engineer a mass move onto renewables and electric vehicles, and soon, their appetite for oil could grow massively.

That means, long-term, it’s still about supply and demand. And the price of oil really can’t go anywhere but up.