Mat-Su Borough to consider alterative property tax arrangement to aid big Alaska LNG Project

A resolution authorizing the Matanuska-Susitna Borough to negotiate a Payment-in-Lieu-of-Tax, or PILT, agreement with developers of the proposed Alaska LNG Project was introduced at the borough assembly’s Tuesday, Feb. 3 meeting. It is set for a public hearing at the assembly’s Feb. 17 meeting.

A PILT is an agreed-on alternative to a traditional property tax based on the assessed value of a property. Gov. Mike Dunleavy, a strong advocate for the big gas project, is urging municipalities along the pipeline route to discuss local tax issues affecting the project. Mat-Su’s borough manager, Mike Brown, has been participating in an informal oil and gas tax working group with the North Slope Borough, the Fairbanks North Star Borough and the Kenai Borough, Brown told the assembly.

The state’s Alaska Gasline Development Corp., or AGDC, is also participating. ADGC which led the development of the Alaska LNG Project and has now formed a partnership with privately-owned Glenfarne Group, an energy infrastructure company, to construct the project. Glenfarne is now working to attract investors in a phase one of the project, the 806-mile, 42-inch pipeline built from the North Slope, and hopes to announce a decision on the project in March, ADGC President Frank Richards told assembly.

About 180 miles of the pipeline will be built through the Matanuska-Susitna Borough with most of the route on the west side of the Susitna River, a remote area with no roads. If it is built the project would be a $3.2 billion addition to the industrial tax base of the boroughs assuming the current 8.85 mill area-wide property tax rate, Brown told the assembly.

However, property taxes, both at the state and local levels (the state has a 20-mill oil and gas property tax) have emerged as one of the key problems affecting the economics of Alaska LNG, which are considered marginal.

That’s because the current state and local property taxes would impose an estimated $760 million annual tax bill on the project which would have to be said in the early stages of the project as its developers are still ramping up LNG production.

That burden would make Alaska LNG uneconomic, Brown told the assembly. Because of this the governor is exploring alternatives that could rely on alternative structures of payments to the state and municipalities, examples being as a negotiated fee based on the volume of gas transported through the pipeline. An arrangement like this would result in a lower burden while the export sales of LNG is increased and volume of gas is being transported is growing.

That results in a lower burden in the early stages of Alaska LNG but higher payments later when the project reaches its full capacity. This is easier for the project to accommodate because the current property tax, which is based on the value of the property, results in a high tax burden in the early years for Alaska LNG, but also a declining value later as the value of the property is depreciated.

Alternative tax arrangements negotiated through PILTS are not uncommon, even in Alaska. In the Northwest Arctic Borough, for example, a PILT has been negotiated with Teck Resources, which operates the large Red Dog lead and zinc mine in the region. Federal agencies with property and facilities that are tax-exempt also make payments to local governments through PILTs.

Brown said the borough administration wanted to get the issue before the assembly and the public early. He is seeking the assembly’s approval to participate in negotiations for a PILT. The negotiations would involve the state as well as the other local governments along the proposed pipeline route. Mat-Su is the first of the “pipeline municipalities” to take the question to the public, Brown said, although the governor is expected to introduce state legislative soon that would establish a structure for a PILT including how municipalities would be included.

Participating in this is important for Mat-Su because the state has the authority to simply exempt Alaska LNG from local property taxes or to limit taxes including those paid to Mat-Su. There are a lot of other reasons to be involved. For example, current state law would limit property taxes, state and local, while the project is in construction because that is before Alaska LNG is operating and earning revenue, and when the economic impact would hit hardest.

However, construction is precisely when impacts hit local governments where the pipeline is being built. Impact mitigation payments of some kind could be expected as part of a PILT negotiation.

Brown explained that the Alaska LNG Project is being planned in two phases, the first being the pipeline from the North Slope to Beluga, where it could provide gas to the existing Enstar Natural Gas pipeline system as well as to be available for Fairbanks, in the Interior. Once this is built the project would move to phase two, an extension of the pipeline across Cook Inlet to Nikiski, near Kenai, and construction of the planned large liquefied natural gas export plant at Nikiski.