At this time of high oil prices and the restructured oil tax, which I supported, there is no need for any new citizen-based tax.

The largest problem for future state revenue is the declining oil volumes being produced on the north slope. Regardless of the tax structure, if there is less oil and less profit to tax, the state will see decreasing revenues. Currently the north slope oil production is declining at 6-12% per year. The state treasury has been saved by the coincidence of the introduction of a profits-based tax and extraordinarily high prices per barrel, which is creating mega profits. These profits are then subject to a progressivity feature which doubles the tax rate at these high prices. Declining production still is the major threat; even 50% of zero equals zero. The reason for urgency on a gasline project is that it will take over 10 years before gas can begin being shipped. If the decline in oil production continues, we would be running budget deficits long before gas begins to create offsetting revenue. An in-state bullet line, which I fully support, would be taxed at the low in-state tax rate and would not generate significant revenue to offset the oil revenue decline. Another option is the conversion of gas on the North Slope to synthetic crude oil (syncrude) and mixing it with North Slope oil for shipment down the existing TAPS pipeline. This additional volume could be up to 300,000 barrels per day and would extend the useful life of TAPS by 35 years from the estimated on-shore volume of natural gas.

However, if a gasline does not get built, then I think you need to know my philosophy on the relative consequences of various proposals if any are ever needed to be considered again.

• Aces and Progressivity
• Mining Taxes
• Percent of Market Value (POMV)
• Statewide Sales Tax (2004)
• Income Tax

The Governor originally proposed Alaska's Clear and Equal Share (ACES), to make changes to the Petroleum Profits Tax" (PPT). PPT had changed the entire structure of oil taxes from a gross tax to a net profits tax. The net profit tax automatically adjusts to variations in oil price and yields much more money to the state at higher oil prices. Three major proposed changes were: to raise PPT's base tax rate from 221/2 to 25%; start the progressive tax rate at $30 instead of PPT's $40 net profit; and lower the progressivity to .2% per dollar. These changes were considered because of the atmosphere and scandals surrounding PPT that could have lead to an inappropriate tax structure. In the end the Legislature doubled the proposed progressivity, adopted the 25% base rate, the $30 net price starting point proposed by the Governor, and also removed the previous cap on progressivity. We retained a 20% tax credit. The incentive effect of high State of Alaska participation by the credit and profit tax method has yielded major new investments on the North Slope which includes accelerated investigation of heavy oil. This demonstrates that the claim by industry supporters that a high profits tax structure would drive investment away appears incorrect. Alaska has reaped a huge reward in revenue without slowing investment on the North Slope. The last year investment has slowed and we are attempting to determine if that is related to the tax structure or the general slowing of the economy and reluctance to invest in expensive projects worldwide.

We also capped operating expense deduction growth for 3 years while the new system is implemented, which has prevented deduction 'games' of the profit tax system. The 3 year sunset was important because artificially estimating future costs does not accurately account for future level of expenses.

The Legislature provided a huge incentive for in-state gas projects by limiting the tax rate for any gas sold for in state use to the low Cook Inlet rate of 5% without progressivity.

In both the 24th and 25th Legislatures I proposed mining tax reform. Mining tax reform was extensively investigated and refined under my jurisdiction as chairman of the State Affairs Committee in 2006. In 2007-08 this refined version had multiple hearings in the Ways and Means Committee and passed out of committee, but did not get a hearing in the Resources Committee. Mining taxes in Alaska have not been significantly revised since statehood and are inappropriate for multinational corporations and giant scale projects. A significant issue is the current royalties based on net income. Royalty should be based on the value of product extracted not the efficiency of the company taking the minerals. Large mines in the state generally pay from 2.5 to 5.5% "Net Smelter Return" – NSR, which is a measure of the gross value of the minerals. These payments are made to private land owners such as the Native Corporations and the Mental Health Trust. Future mines on state lands should pay a similar royalty to the state. Another reform is needed to correct current law which allows companies annual write-offs of total investment and expense. After taking 100% cost depreciation, the mining company can then switch to resource or percent depletion, which is an outmoded regime that lets a company reduce it's taxes based on the percentage of estimated minerals it has previously removed. The final major reform that is needed is the equivalent to the oil production tax which is called the mining license tax. This is currently set as a percent of net income. This tax should have a higher excluded base and then more progressivity, though not as high as oil taxes because of the differing nature of the oil/gas and mining industries.

You can see the details of these reforms in my bill, HB 156, which passed Ways and Means in 2008.

The Permanent Fund principal is fully protected by the Constitution and cannot be touched without a vote of the people. The original idea behind changing the Fund management to a Percent of Market Value payout was to automatically inflation-proof the Fund. Currently statute provides for calculation of inflation-proofing based on a formula like cost of living adjustment. This is not automatic and this money from the earnings reserve must be appropriated by the legislature each year. The Fund managers worry that in a fiscal crisis the legislature will not appropriate the inflation-proofing money (~700 million). The assumption is that a huge fund like this will make a long term gain of 8 percent and if the payout is limited to 5 percent, the remaining 3 percent (~800 million) is automatically retained to cover the long-term inflation rate. Another argument for changing to POMV is to insure that there is always money available to pay the Dividend.

The biggest impetus for POMV was that if there is a 5 percent payout and if we continue the 50 percent of earnings concept to be paid as PFDs, the other 50 percent would solve the state's structural budget gap (~700 million) without raising taxes. The possible 'downside' of POMV is that with some of the payout being used to fund government services, the Fund could grow more slowly and therefore the potential growth in the dividend may be less. You may have seen the graphs that show the PFD being higher with POMV for the first 3 years, but thereafter growing at a slower rate and projected to be lower than under the current system. However, the comparison graphs are very misleading. They compute the current program yield as if all earnings were reinvested. The reality is that if the Constitutional Budget Reserve is used up by the fiscal gap, as projected, the earnings reserve is the ONLY LEGAL place where the money can come from to balance the budget - which is a requirement of the Constitution. So the graph showing current PFD growth is wrong unless oil prices stay high (above $40 in 2004, above $56 in 2007) or other income sources come online. I supported putting the issue on the 2004 November election ballot and was willing to have the public discussion. I am not afraid to let the voters decide directly rather than the legislature limiting the voter's options.

This was probably the most inefficient tax proposed. It would have required many additional State employees to collect and oversee. It would have produced a large burden on most of the businesses in the State. If monthly deposits, quarterly and annual reports were required, the paperwork burden on cities without a current sales tax would be enormous. The thousands of small businesses without bookkeepers would suffer. The impact on towns that now rely on a sales tax would be significant. The specifics of any plan would determine the impact, however if a statewide plan exempted certain items like food and medicine there could be a dramatic reduction in local sales tax in some communities. In addition, if the statewide sales tax increased the cap on which local taxes are collected, this would be an incentive for most large purchases to be made in Anchorage. All in all, I think a large percentage of the tax would be wasted on just collecting it. I intend to oppose any statewide sales tax.

An income tax that sets up a complicated new system should be avoided. The State could apply a flat tax rate to the amount paid on federal taxes, as it did in the past. This is a simple process that requires no further calculation or itemization. Employee taxpayers would simply have another item deducted from their check by employers. Self-employed business owners would simply file a single sheet along with a copy of their federal 1040.

This is probably the simplest broad-based tax to administer. It has the further benefit of also getting revenue from the approximately 60,000 non-residents who earn income and utilize State services. Most of those non-residents would not pay any increase in total taxes, because they currently pay income tax to their state of residence on income earned out-of-state (in Alaska). If the State revenue drops below that necessary for the citizen's desired services, I would support the idea of a $100 minimum tax, which could be satisfied as a check off box on the PFD. This would mean that every Alaskan would be helping to pay for state services such as education.

Another concept that has been suggested is a limited tax credit for property tax paid. This has the benefit of increasing the proportion that is paid by nonresident workers, but it also starts down the road of a state system of deduction and credits, which we should avoid.

The reality of our situation with high oil prices creating a budget surplus is that no broad-based tax will be instituted. No significant portion of the public across the State is willing to tax themselves just to put the money into a government savings account in case future revenues fall, nor are they willing to have the legislature significantly increase spending.