Trans-Alaska Pipeline System - Impact - Economy of Alaska

Economy of Alaska

Main article: Economy of Alaska See also: Alaska Permanent Fund

The wealth generated by Prudhoe Bay and the other fields on the North Slope since 1977 is worth more than all the fish ever caught, all the furs ever trapped, all the trees chopped down; throw in all the copper, whalebone, natural gas, tin, silver, platinum, and anything else ever extracted from Alaska too. The balance sheet of Alaskan history is simple: One Prudhoe Bay is worth more in real dollars than everything that has been dug out, cut down, caught or killed in Alaska since the beginning of time.

Alaska historian Terrence Cole

Since the completion of the Trans-Alaska Pipeline System in 1977, the government of the state of Alaska has been reliant on taxes paid by oil producers and shippers. Prior to 1976, Alaska's personal income tax rate was 14.5 percent—the highest in the United States. The gross state product was $8 billion, and Alaskans earned $5 billion in personal income. Thirty years after the pipeline began operating, the state had no personal income tax, the gross state product was $39 billion, and Alaskans earned $25 billion in personal income. Alaska moved from the most heavily taxed state to the most tax-free state.

The difference was the Trans-Alaska Pipeline System and the taxes and revenue it brought to Alaska. Alyeska and the oil companies injected billions of dollars into the Alaska economy during the construction effort and the years afterward. In addition, the taxes paid by those companies altered the tax structure of the state. By 1982, five years after the pipeline started transporting oil, 86.5 percent of Alaska revenue came directly from the petroleum industry.

The series of taxes levied on oil production in Alaska has changed several times since 1977, but the overall form remains mostly the same. Alaska receives royalties from oil production on state land. The state also has a property tax on oil production structures and transportation (pipeline) property—the only state property tax in Alaska. There is a special corporate income tax on petroleum companies, and the state taxes the amount of petroleum produced. This production tax is levied on the cost of oil at Pump Station 1. To calculate this tax, the state takes the market value of the oil, subtracts transportation costs (tanker and pipeline tariffs), subtracts production costs, then multiplies the resulting amount per barrel of oil produced each month. The state then takes a percentage of the dollar figure produced.

Under the latest taxation system, introduced by former governor Sarah Palin in 2007 and passed by the Alaska Legislature that year, the maximum tax rate on profits is 50 percent. The rate fluctuates based on the cost of oil, with lower prices incurring lower tax rates. The state also claims 12.5 percent of all oil produced in the state. This "royalty oil" is not taxed but is sold back to the oil companies, generating additional revenue. At a local level, the pipeline owners pay property taxes on the portions of the pipeline and the pipeline facilities that lay within districts that impose a property tax. This property tax is based on the pipeline's value (as assessed by the state) and the local property tax rate. In the Fairbanks North Star Borough, for example, pipeline owners paid $9.2 million in property taxes—approximately 10 percent of all property taxes paid in the borough.

The enormous amount of public revenue created by the pipeline provoked debates about what to do with the windfall. The record $900 million created by the Prudhoe Bay oil lease sale took place at a time when the entire state budget was less than $118 million, yet the entire amount created by the sale was used up by 1975. Taxes on the pipeline and oil carried by it promised to bring even more money into state coffers. To ensure that oil revenue wasn't spent as it came in, the Alaska Legislature and governor Jay Hammond proposed the creation of an Alaska Permanent Fund—a long-term savings account for the state. This measure required a constitutional amendment, which was duly passed in November 1976. The amendment requires at least 25 percent of mineral extraction revenue to be deposited in the Permanent Fund. On February 28, 1977, the first deposit—$734,000—was put into the Permanent Fund. That deposit and subsequent ones were invested entirely in bonds, but debates quickly arose about the style of investments and what they should be used for.

In 1980, the Alaska Legislature created the Alaska Permanent Fund Corporation to manage the investments of the Permanent Fund, and it passed the Permanent Fund Dividend program, which provided for annual payments to Alaskans from the interest earned by the fund. After two years of legal arguments about who should be eligible for payments, the first checks were distributed to Alaskans. After peaking at more than $40 billion in 2007, the fund's value declined to approximately $26 billion as of summer 2009. In addition to the Permanent Fund, the state also maintains the Constitutional Budget Reserve, a separate savings account established in 1990 after a legal dispute over pipeline tariffs generated a one-time payment of more than $1.5 billion from the oil companies. The Constitutional Budget reserve is run similar to the Permanent Fund, but money from it can be withdrawn to pay for the state's annual budget, unlike the Permanent Fund.