Alaska State Senate Rules Committee
Senator Bill Wielechowski, Chair
Senate Bill 114
SB 114 addresses two existing deficiencies with Alaska’s oil tax laws through reasonable reforms.
Closing the S-Corp Tax Loophole
In 1958 Congress established the S Corporation (S-Corp) tax classification of the IRS tax code to
benefit small businesses and help them stay viable. The S-Corp tax category bypasses income taxes
on the entity, enabling tax liability to “pass through” to apply only against the earnings of the
individual shareholders. Alaska tax law incorporates the IRS tax code by reference, including
taxation of companies. But in 1980 Alaska repealed its personal income tax. This results in an anomaly where the state generates tax revenue from the profits of a traditional C Corporation (C-
Corp), while an S-Corp that is just as profitable doing business in Alaska gets to avoid paying the state any corporate income tax.
The legislative record of the personal income tax repeal demonstrates no deliberation regarding
effects on pass-through taxation. The policy rationale and alternate taxing arrangement that led
Congress to create the IRS S-Corp classification cannot be met in Alaska. The consequence can
only be viewed as an inadvertent loophole of our tax structure that must be closed.
Under SB 114, non C-Corp entities making significant profits from Alaska’s oil and gas resources
will pay the same tax rate as C-Corps. The new 9.4% tax would apply only to entities making over
$4 million in profits from oil and gas production or pipeline transportation, and only to their profits
above $4 million.
Reducing the Sliding-Scale Per-Barrel Credits & Requiring Investment Match
The sliding-scale per-barrel credit was established in law in 2013 under SB 21, the “More Alaska
Production Act” (MAPA). The deductible credit provides the major North Slope oil producers a
discount on their production taxes for each barrel of oil produced based on a sliding scale,
depending on the price of oil. The credit ranges from $8/barrel when the gross value of oil is less
than or equal to $80/barrel, to $1/barrel when oil is valued at less than $150/barrel. The program
similarly allows producers receiving a “new field” reduction on their tax liability to take a flat
credit of $5/barrel.
SB 21 was introduced with no per-barrel credits. The Senate added a flat $5 per-barrel credit for
all producers. When SB 21 passed the Senate on March 21, 2013, the Governor, industry, and
others supported just a $5 credit. The House made the $5 credit apply to the new fields and added
the $8 to $1 sliding-scale per-barrel credits for existing fields. In the final hours before
adjournment, the Senate relied on the House vetting process and voted to concur with the changes
to SB 21.
Through fiscal year 2023 Alaska will have lost $7.2 billion in revenue to the per-barrel credits.
This fiscal year alone, the credits will cost the state $1.1 billion, and it’s estimated that Alaska will
lose out on another $8.7 billion in the next nine years.
SB 114 reduces these credits to a $5 to $1 sliding scale, then ties the credits to investment;
producers earn the credit only up to the amount matching their qualified capital expenditures from
the same tax year. The new investment qualifier encourages investment spending on projects in
Alaska that will maintain production, create jobs for Alaskans, and promote industry growth.