Alaska Gov. Sarah Palin said she will call state lawmakers into special session on Oct. 18 to reconsider the state's petroleum profits tax (PPT), which, according to a recent report, is yielding $800 million less than was expected.

The historic rewrite of the state's oil and gas taxes was passed in special session following much wrangling between lawmakers and former Gov. Frank Murkowski (see NGI, Aug. 14, 2006). The tax rewrite was seen as key to moving forward with the plans for a gas pipeline to allow commercialization of North Slope reserves (see NGI, July 9).

During legislative wrangling over the PPT proposal last year, critics charged that the PPT bill was fuzzy on defining producer costs suitable for deduction. "I think we're saying we're going to get all this revenue, when those of us who have kind of read this whole package know that we're going to take that revenue away," said Sen. Gretchen Guess (D-Anchorage) as quoted by the Anchorage Daily News in August 2006.

At the direction of Palin, the state's Department of Revenue has reviewed the implementation of PPT and found that it is "resulting in far less revenue than was estimated in the fiscal notes prepared in support of the bill," Palin's office said. Further, the review found that companies are reporting far greater costs than were predicted, and exploration companies are getting less value from credits included in PPT than was expected due to a limited resale market for the credits.

"In FY 2008, based on forecasted price and production levels, the PPT is expected to generate about $250 million mover that which would have been generated under the ELF [economic limit factor, the states old tax] system. However, this is more than $800 million less than what was predicted in the PPT fiscal note," the Department of Revenue report said.

High oil and gas prices have made exploration and production projects around the world economic when they once weren't, the report noted. This has increased demand for limited supplies of engineering, procurement and construction services as well as raw materials, driving up producer costs.

"The state's experience with PPT puts a spotlight on the risks associated with a net profit-based tax system," the department said. "The new system introduced the added variable of costs into the oil revenue equation. While it is a risk that is inherent in the decision to approve a net profit-based tax, the question is whether the magnitude of the risk was fully understood by the legislature given the information provided to them. While costs would be expected to increase, the dramatic difference between what was predicted and what has actually been experienced brings into question whether the legislature made its decisions based upon appropriate information."

Palin has told the Department of Revenue to come up with a proposal to fix PPT's problems to be released by Sept. 4. "This will provide the legislature and public with more than 40 days to become familiar with the proposal before the special session begins," Palin's office said.

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