During the 2024 legislative session, we wrote several columns opposing the subsidy of the development of Cook Inlet gas at the expense of the state’s general fund. As we explained then, we believed Southcentral gas consumers should pay the full market rate for their gas supplies, including the associated state royalties.

Doing otherwise would result in cross-subsidies within the state, as others in the state would be required to contribute more to general funds, likely through additional cuts in Permanent Fund Dividends (PFDs), to make up for the loss of state revenues foregone by subsidizing Cook Inlet gas consumers.

The issue appears to be returning, this time as part of the Alaska LNG discussions. 

Under current law, the state assesses a property tax of 20 mils on the value of oil and gas facilities. The tax applies whether the facilities are used to deliver oil and gas within the state (in-state) or for export. In-state consumers pay the same tax on the facilities used to deliver the volumes they receive as is applied to exported volumes.

Governor Mike Dunleavy (R – Alaska) argues that assessing that level of tax on the Alaska LNG project would make the project uneconomic, and has proposed a bill changing the tax to a volumetric charge of 6 cents per thousand cubic feet (mcf) transported through the project’s facilities. The change would both defer the timing and the level of the tax. 

The reduction in the tax level would be substantial, with some estimates suggesting it would reduce the effective tax rate by nearly 90%. While significantly lower than the level provided under current law, Governor Dunleavy’s proposed tax would still apply equally to deliveries made through the facilities, whether for in-state use or export.

Generally, both houses of the Legislature have agreed that the current tax level makes the project uneconomic. 

Especially in the Alaska Senate, however, there has been significant disagreement about the depth of the reduction proposed by the Governor, with several viewing it as overly generous to the project owners. The following chart, from a recent presentation by the Legislature’s consultant, GaffneyCline, is used by them to help make the point.

The chart traces recent LNG prices in the Asian market, as captured by the Japanese import price (orange line) and an oil-indexed price (blue). The chart plots those against the “zone of profitability” for the Alaska LNG project, using the existing property tax (the blueish shaded area) and the alternative volumetric tax (AVT) proposed by the Governor (the dashed line).

As the chart shows, using both measures (Japan import price and oil-indexed), LNG prices in the Asian market have been both within and below the zone of profitability over the period using both tax approaches. Those who believe that the Governor’s proposal is too generous to the project owners emphasize the length of the periods during which prices have been within the profitability zone under the current tax approach (the bluish-shaded area). 

Those who believe the Governor’s proposed cuts are needed to make the project economically viable emphasize the length of the periods during which prices have been below the zone of profitability under the current tax approach, and indeed below the zone of profitability even under the proposed AVT.

While there has been less disagreement in the Alaska House, there is still a view that the project could tolerate higher rates, at least during periods of higher LNG prices.

However, the changes both houses of the Legislature are considering to the Governor’s proposal are not limited to the overall tax rate applied to the facilities. In responding to the Governor’s proposal, both the Senate and House appear to be considering bills that would charge the facilities used to deliver gas to in-state consumers significantly less in property taxes than the rates assessed on the volumes being exported.

Senate Bill 275, the lead Senate bill currently under consideration, does so by adding a 15-cent surcharge on every thousand cubic feet (mcf) of gas liquefied for export. By focusing the property tax in that manner, it effectively exempts gas delivered for in-state use, even though that gas has used the same pipeline facilities to reach the point of in-state delivery.

House Bill 381, the lead House bill currently under consideration, does it differently. The draft currently under consideration applies the Governor’s proposed universal 6-cent volumetric tax to both in-state and export volumes. But it then adds a second tax surcharge, linked to the Japan-Korea Marker (JKM), another measure of Asian LNG prices, which would apply only to export volumes. Under the current version of the bill, the surcharge “slides” up or down based on the JKM price, with the surcharge higher at higher price levels and lower at lower price levels.

Importantly, the lower tax proposed for in-state deliveries is not driven by competitive concerns. As the various GaffneyCline and other analyses make clear throughout, at full volumes, the delivered price for those receiving in-state gas from the project is far lower than any alternative.

The tax differentials are also not based on the fact that export volumes require additional property to become commercial, namely, an LNG liquefaction plant located in Nikiski. Most projections estimate that roughly half of the project cost will be in the pipeline and upstream facilities required to deliver the gas to Southcentral, with the other half in the liquefaction facilities required to prepare the gas for export. The Governor’s proposal applies the 6-cent tax to all volumes, regardless of whether they use the liquefaction facilities.

While all volumes use the facilities upstream of the liquefaction plant, the current Senate proposal applies the property tax only to volumes using the liquefaction facilities. The in-state volumes, which also use facilities upstream of the liquefaction plant, are effectively tax-free.

The current House proposal takes a different approach. Like the Governor’s proposal, the House proposal applies a 6-cent tax to all volumes regardless of whether they use the liquefaction facilities, and then adds its proposed JKM-driven surcharge to the volumes using the liquefaction facilities. But the surcharge is not related to the cost of the liquefaction facilities. The current proposals appear to range from 0 to 19 cents, depending on the JKM price. At higher price levels, liquefaction volumes pay a tax rate more than 4 times that of in-state volumes, despite requiring only about twice the investment.

Because it is not related to the cost of investment, the proposed House surcharge essentially says that the gas is more valuable during periods of high JKM prices, and bases the tax on that. Yet although the gas is more valuable, the volumes delivered for in-state use are not subject to a similar surcharge. Like the previous Cook Inlet proposals, the failure to do so results in an underrecovery of the tax on the in-state volumes during those periods, effectively creating a hole in state revenues that will necessarily need to be filled by additional revenues from other sources, most likely in the current environment, additional PFD cuts paid for by all Alaska families, including those not served from the LNG project.

This cross-subsidy should be unacceptable. Generally speaking, approximately 75% of the state’s population is within the reach of the in-state portion of the Alaska LNG project; 25% is not. Those within the project’s reach will receive at least some offsetting benefit for any additional amounts they are required to contribute to state revenues to offset the subsidy they receive through lower tax rates. 

However, the 25% beyond will not. Their only role will be to contribute more to state revenues to help offset the subsidies.

Moreover, it’s not clear that even for those within the project’s reach, the offsetting benefit will match the cost of the subsidy borne by those paying it. PFD cuts are highly regressive. Indeed, according to Professor Matthew Berman of the University of Alaska-Anchorage’s Institute of Social and Economic Research (ISER), they are the “most regressive tax ever proposed.” The benefit of the subsidy may or may not also be tilted some toward middle and lower-income Alaska families. But even if it is, it is unlikely that the tilt will be to the same extent as the cost of using PFD cuts to pay for it.

Because of the cross-subsidies they create, good fiscal policy should limit the use of state subsidies to instances where they are absolutely necessary and narrowly target them to those who require them. 

Here, the subsidies are neither required nor targeted. By subsidizing the Railbelt’s thermostat through an additional statewide tax on the PFD, Juneau isn’t solving an energy crisis—it’s just sending the bill to the families least able to pay it. As with the proposed Cook Inlet subsidies a few years ago, these cross-subsidies should be eliminated from any final bill.

Brad Keithley is the Managing Director of Alaskans for Sustainable Budgets, a project focused on developing and advocating for economically robust and durable state fiscal policies. You can follow the work of the project on its website, at @AK4SB on Twitter, on its Facebook page or by subscribing to its weekly podcast on Substack.