JUNEAU, Alaska -- New projections that show the latest version of a major oil tax overhaul could cost the state more than $9 billion over the next six years sparked sharp divisions Wednesday on a key Senate panel over whether that will be harmful.
A prominent Senate Democrat said a slide in oil revenue would require the Legislature to dip deeply into savings. But a Republican senator argued that the state spends too much as it is and that's the real problem.
Critics of oil tax cuts, including some watchdogs and labor unions, worry that plummeting oil revenue would give conservatives in the Legislature all they need to choke off state spending.
With this year's legislative session two-thirds over, the Senate Finance Committee on Wednesday got its first look at the projected financial impacts of its version of Senate Bill 21, Gov. Sean Parnell's oil tax measure.
The bill would significantly lower oil taxes in the hopes of spurring new investment and reversing a decline in production. The financial impact projections are in a draft analysis from Parnell's Department of Revenue.
Sen. Lyman Hoffman of Bethel, the lone member of the Democratic minority caucus on the Finance Committee, said the cost to the treasury would be huge.
"These are truly staggering numbers to be looking at," Hoffman said.
Even with no changes in the tax structure, to balance this year's budget the state may have to tap savings accounts to the tune of $400 million, Hoffman said.
If the new tax measure became law, eliminating an element in current taxes that sets progressively higher tax rates at higher oil prices, the projected hit next budget year would range from $1 billion to $1.3 billion, meaning a deficit of perhaps $1.6 billion.
"To move this much cash across the table is going to have in my view detrimental effects to the state's operating budget," Hoffman said.
Oil revenues make up 90 percent of the state's general fund and pay for everything from teachers to troopers to roads.
By the 2019 budget year, the cost would likely be between $1.4 billion and $1.8 billion, without accounting for any new oil production.
Sen. Kevin Meyer, R-Anchorage and the co-chairman of the Finance Committee, said he understood the concerns but oil production is declining and the state needs to become more competitive with other oil-producing regions.
Sen. Donny Olson, a Democrat from Golovin, near Nome, who joined the Republican-led caucus this session, asked Parnell administration officials how much additional oil needed to be produced to make up the lost revenue from lower taxes.
"How many barrels are we going to have to have?" Olson asked.
Mike Pawlowski, the revenue department's oil-tax advisor, said the administration and consultants were working on that analysis but so far have evaluated three different scenarios.
Under the most optimistic scenario, an operator in an existing oil field would build a new drill pad and add 15,000 new barrels a day in 2014, expanding that to 90,000 new barrels by 2019. The scenario assumes that none of that would qualify for an extra tax break aimed at previously untapped pools of oil and concludes that by 2018, the state would be collecting slightly more oil tax revenue than it does under the current tax regime.
That's just a hypothetical example, but the loss to the treasury would be real, Hoffman said.
The other committee co-chairman, Republican Sen. Pete Kelly of Fairbanks, said the budget problem arises because the state spends too much, not because of diminished oil production.