The sale of BP’s Alaska properties to Hilcorp. could bring the state personal income tax back to Alaska.
Though nobody in their right mind wants to bring the income tax back, it could be the best long-term solution to solving this state’s fiscal problems.
And it could end the most unfair way Alaska has developed for meeting state financial obligations — paying its bills by reducing the amount of the Alaska Permanent Fund dividend checks.
Unlike BP, Hilcorp. is a privately held corporation and its earnings are considered individual income to its owner, Texas billionaire Jeffery Hildebrand. And since Alaska did away with the personal income tax in 1980 when oil throughput in the trans-Alaska pipeline was 1.5 million barrels a day and headed for 2 million, Hildebrand and the rest of us pay no state income tax — in Alaska.
BP’s payments to the State of Alaska in 2018 were $804 million but that included both taxes and royalties. No breakout is publicly available but the bulk of those payments is the company’s royalty commitment (royalty represents the state’s retained share of the oil). Hilcorp. will still be paying royalties on the oil it produces and ships from Alaska.
No breakout of royalties vs. corporate income tax is available on BP’s payments to Alaska, but estimates of those taxes range from $25 million to $60 million per year. So Hilcorp. will continue to be a mainstay for Alaska’s state treasury through its royalty payments, but the state will no longer receive the $25 million to $60 million from income taxes that BP paid.
That money will have to be made up somehow or state-funded agencies and organizations will lose another chunk of state money comparable to the amounts that vanished when Gov. Mike Dunleavy first went on his ax-wielding budget rampage earlier this year. Prospects for new state revenues are actually looking good these days since ConocoPhillips and Oil Search are expected to bring new oilfields into production over the next few years. And a lease sale later this year on federal lands in the Arctic National Wildlife Refuge could bring some promising new oil lands into play a few years from now.
So the news is certainly mixed and the prospects for the Alaskan economy are overall pretty good. But one painful reality seems just over the horizon — Alaska will have to bring back the personal income tax sometime in the next few years.
Bringing back the income tax would not just be aimed at taxing Jeffery Hildebrand’s earnings on the properties for which his company is paying BP a total of $5.6 billion. It would put all Alaskans back into their all-important role as contributors to meeting state obligations.
The big problem with not having an income tax — besides having to skimp on the state’s financial obligations — is that part of the need has been met in recent years by cutting back on the dividend checks. This year, if the traditional formula were followed, the checks would be around $3,000. Instead we will each (probably) get a check for around $1,600. And that assumes that the governor and the Legislature resolve their differences over the dividend.
Reducing the amount of those checks is very unfair to people on the lower end of the economic scale. Each Alaskan gets exactly the same amount in their dividend checks, but for those with smaller overall incomes the dividend reductions represent a significantly larger portion of their incomes — and they can least afford the cuts. So cutting the amount of the dividend hurts those on the low end of the economic scale far more than it does those on the higher end, to the tune of $1,400 this year.
Jeffery Hildebrand doesn’t live in Alaska so he doesn’t qualify for a dividend check. But if he did live here those little checks wouldn’t even be noticeable on his bottom line.
Bringing back the state income tax is almost certainly going to be the only way Alaska can meet its financial responsibilities in the years ahead. Some people would like to raise taxes on the oil industry but that would almost certainly result in reduced future investment on industry’s part and even worse economic impacts in the years to come.
I wouldn’t say it’s past time to bring back the state’s individual income tax, but it sure looks like that time is fast approaching.