DAVID BLACKMON: Alaska’s Budget Problems Are A Cautionary Tale For Texas

 What would happen to Texas if it’s the Biden administration’s ongoing efforts to restrict its oil and gas industry were to succeed? What would happen to the state’s budget and economy if, say, the proposed endangered species listing of the Dunes Sagebrush Lizard or Environmental Protection Agency’s threat to hold the entire Permian Basin in violation of ozone standards had the impact of cutting production of oil and gas in half?

What has been happening in Alaska in recent years could provide a real-world example. Biden’s anti-energy policies have played a big role in leaving that state with a big budget hole, and some proposals to address the problem could place the state on a path to a California-like high-tax, slow-growth economy.  

Alaska has been viewed over the years as a wealthy state sporting big state budget surpluses. The tax, leasing and royalty revenues coming from oil and gas have annually exceeded the true needs of state government, enabling it to pay an annual dividend to residents from the surplus. The bonus for 2022 came to $3,284 per person, in fact. 

But here’s the thing: the energy and mining sectors not only pay for the dividend, their taxes account for two-thirds of the state’s revenues. That easy money has led to easy budget decisions, and per capita state and local spending is the highest in the nation at more than $17,000. That is twice as much as the state of Florida, whose economy is booming.

Rather than cut spending, some in the legislature want to tax more — much more. Proposals include an income tax, something Alaska has never had, ranking as one of just nine states without one. Also, a new state sales tax, a 40% increase in the fees charged to oil and gas producers and other potential “revenue raisers” are on the table. Another proposal would tax small oil producers at the same rate as major producers, dealing a blow to the independent energy sector.

The proposal to effectively increase state oil taxes by $3 per barrel would raise $2.5 billion over 10 years, according to some estimates. But the analysis specifically did not include changes to behavior of oil companies in response to the tax hike. And that is not prudent. Such a major tax increase would certainly result in lower drilling and development activity in the state. 

From 2007 to 2013, Alaska used an oil tax system that produced effective rates of more than 90%. All over the world, oil production boomed during this time of high commodity prices, but production in Alaska fell by 300,000 barrels per day in one 6-month period and was projected to drop another 200,000 before the system was scrapped.

Under the new system, production has not declined. Instead of losing money as it was under the previous system, the state made $1.8 billion.

Fortunately, Gov. Mike Dunleavy, a Republican who won by 26 points in 2022, is unlikely to go on the taxing spree being considered by the legislature. He has a reputation as a fiscal conservative and has promised residents he would not raise taxes without a referendum. 

As New York and California have proven, states cannot tax their way to prosperity. This is especially true in the energy sector. What Alaska needs is to get on with extracting its resources and to put its budget right by putting its people to work.

The Bottom Line

We saw a similar dynamic at play in Texas’s legislative session this year, as the booming oil and gas industry gifted state officials with a record budget surplus of $33 billion to start the session. The danger for Texas and other booming oil states is what happens when the boom ends. When that happens, state officials will be faced with the same hard decisions on taxing and spending Alaska officials are dealing with today.

The regulations and red tape from the Biden administration are by design serving to make the situation for Alaska even more difficult to resolve. They are putting Alaskans out of work and making them more dependent on state government while simultaneously reducing state revenues. 

Let’s hope Alaska can devise an effective way out of this mess, because it is a mess that is likely coming to other oil and gas states as the Biden policies continue to take hold.