Millions Ride on Date Tax Kicks in: RETROACTIVE: Higher Oil Levies Could Be Charged From April 1, 2006.

By Wesley Loy, Anchorage Daily News, Alaska

Jun. 24–State lawmakers, unable so far to rally enough votes to raise oil taxes, figure they can avoid losing major revenue by backdating the tax change to April 1 or some other starting point.

But the strategy risks a court challenge from oil companies should lawmakers take months longer to pass a tax overhaul and then attempt to collect too far back in time.

Enormous money rides on the question of when a tax increase would begin.

Gov. Frank Murkowski, who this week called lawmakers to Juneau for a second special session beginning July 12, said the state is losing $3.2 million for each day lawmakers fail to pass his proposed overhaul of the state’s oil production tax. That equates to nearly $100 million a month.

The stakes are even higher under tax bills that have passed either the House or Senate, both of which seem to prefer a more aggressive oil tax change than the governor.

Under the bill passed by the Senate but rejected by the House on June 8, the last day of the first special session, the state would collect an extra $4.7 million a day, or $142 million a month, assuming an oil price of $60 a barrel. North Slope crude oil was priced Friday at $69.57 a barrel.

Both the House and Senate have endorsed starting the tax change as of April 1.

Senate President Ben Stevens, R-Anchorage, said legislators need to come together on an oil tax bill in Juneau.

“It’s imperative that we go down and approve an oil tax restructuring to be able to capture the period of these high prices,” he said.

Stevens added that lawmakers can’t count on backdating a tax increase too far.

“If we go further and further in the future and attempt to reach further and further back in the past, that’s probably subject to litigation,” he said.

Oil companies have previously sued the state after major changes in oil taxes, challenging retroactive application and other aspects of the changes.

In two major cases, one decided in 1992 and the other in 1985, the Alaska Supreme Court ruled against the oil companies and allowed backdated tax collections.

But the amount of money potentially at stake today is much larger, and that might make a difference in the vigor of a legal challenge.

Murkowski and executives with BP, Exxon Mobil and Conoco Phillips have said the oil companies reluctantly agreed to pay higher oil taxes so long as they don’t go higher for 30 years. In exchange, the oil companies said they would sign Murkowski’s proposed tax contract for a natural gas pipeline. The oil companies say the contract could help them decide to build the $21 billion pipeline, long one of the state’s fondest economic development dreams.

But oil company enthusiasm for increased oil taxes could quickly evaporate should the gas contract fall apart — and so far, the governor’s draft contract has drawn a barrage of criticism.

Already, oil company representatives are on record as decrying retroactive taxation.

“We believe that it’s bad policy,” BP spokesman Daren Beaudo said Friday.

Paul Laird, general manager of the Alaska Support Industry Alliance, a trade association of businesses that support oil field operations, said oil companies might just trim their spending in Alaska to offset back tax collections.

He said representatives of his group have already testified in Juneau that retroactive tax boosts are “morally reprehensible.” Imagine, he said, if the federal government told Alaskans it intended to collect additional income tax over and above what they’d already paid.

“You’d hear the squealing from here to Washington,” he said.

Murkowski, as part of the deal he negotiated with the oil companies, proposes no backdating.

The question of how far into the past a change in state law can be applied is a gray area that depends on legal precedent in both state and federal courts. It’s a topic that Alaska officials have mulled several times over the years.

In 1988, as state lawmakers weighed scaling back a major industry tax break, state lawyers concluded that a law applied as far back as Jan. 1 of the year in which it was passed was sure to be deemed legal by the courts. They cited federal court opinions that retroactive taxation was a long-standing practice of government. However, the lawyers said they weren’t sure a law retroactive into the prior year would be constitutional.

In July 1989, all the state’s major oil companies sued the state, arguing that the tax change lawmakers approved that year could not be applied retroactive to Jan. 1 because both houses of the Legislature hadn’t approved the effective date by a two-thirds majority vote, as required by the Alaska Constitution. The oil companies were contesting payment of about $100 million in back taxes.

The state Supreme Court sided with the state and ruled the two-thirds vote wasn’t necessary.

Oil companies also sued the state after lawmakers adopted a new accounting method for oil income, in effect raising industry taxes. The act was signed into law on July 8, 1978, and was “properly retroactive to Jan. 1, 1978,” the state Supreme Court held in an opinion in favor of the state.

Rep. Ethan Berkowitz, D-Anchorage, said he’s confident lawmakers can revamp the oil tax and apply it retroactively within the same calendar year. He noted that the tax overhaul lawmakers are considering would also grant retroactive tax breaks to oil companies for prior oil field investments.

But this is an election year, with Murkowski seeking re-election and nearly every seat in the Legislature up for grabs. Revamping the oil tax would be a huge step, and so far no tax bill has garnered the necessary votes. It’s conceivable that the oil tax issue could slide into the next regular legislative session beginning in January.

Applying the law retroactively to more heavily tax oil produced during this, a year of extraordinarily high oil prices, might be “a little bit more problematic,” Berkowitz said. “But it’s not at all impossible to do.”

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Copyright (c) 2006, Anchorage Daily News, Alaska

Distributed by Knight Ridder/Tribune Business News.

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