Alaska Supreme Court rules oil and gas tax credit bonding plan is unconstitutional

JUNEAU, Alaska (Alaska’s News Source) - The Alaska Supreme Court has ruled as unconstitutional a plan to use bonds to pay Alaska’s outstanding oil and gas tax credits.

On Friday, Justice Craig Stowers wrote that the state’s proposal is “unconstitutional in its entirety.”

Anchorage Democratic Sen. Bill Wielechowski opposed the plan and raised constitutional concerns when it was before the Legislature. “The founders of our state clearly did not want a situation where you could just bond for debt which is exactly what this did,” he said.

The Supreme Court agreed, affirming that the state could only incur debt after a vote of the people, unless it was for a narrow set of exceptions. Paying oil and gas tax credits wasn’t one of those exceptions, the court ruled.

The state currently owes $743 million to tax credit holders as part of a now defunct program that was geared toward small producers and developers to encourage drilling. Lawmakers have not made any tax credit payments in the past two fiscal years, believing the bonding plan would be allowed by the courts.

Legislators will now need to devise a new solution to pay the remaining credits.

In 2019, Gov. Mike Dunleavy proposed using funds from the Alaska Industrial Development and Export Authority (AIDEA) to pay credit holders. The Legislature rejected that idea with some lawmakers saying those funds are meant for economic development and not to pay outstanding tax credits.

In a statement emailed from the governor’s office on Friday afternoon, the Dunleavy administration says the Departments of Law and Revenue will now conduct an in-depth review of the implications of the Supreme Court’s decision.

“The real winner is the Constitution,” said Joe Geldhof, a Juneau attorney who represented Eric Forrer in his successful challenge of the bonding plan. Geldhof said the credit holders would now need to compete with all other spending items in the budget and “not jump to the front of the queue.”

There have been debates over how much the state is required to pay annually to credit holders. Wielechowski has argued the state has an obligation to pay the credits but the amount should be a percentage of what the state makes in production taxes, meaning the figure would be around $30 million for the next fiscal year.

Other lawmakers have said the statute requires the state to pay closer to $70 million per year to credit holders.

Some companies such as Furie Operating Alaska said unpaid credits were part of the reason why they filed for bankruptcy.

“Today’s decision is a major disappointment,” said Kara Moriarty, the president and CEO of the Alaska Oil and Gas Association. “Especially for those very small companies and fields that qualified for these credits. As these small companies evaluate the fallout of this decision, it serves as another long list of reasons why Alaska was described by IHS Markit just this week as “one of the most unstable oil and gas fiscal systems in the world.””

Whatever solution is chosen, the Legislature faces a strained fiscal situation when it convenes in January to write the budget for the next fiscal year. The state will be roughly $300 million in deficit before considering a Permanent Fund dividend.

“And this does not help the situation,” said Sen. Bert Stedman, R-Sitka, the current chair of the powerful Senate Finance Committee.

Stedman said that these tax credits are one obligation the state has and a tough fiscal situation has led to tough decisions by the Legislature.

“The reduction in the state’s dividends over the last several years wasn’t because we didn’t want to pay dividends, it was because we were running out of cash,” Stedman said. “And this is a classic example why the state Legislature was so concerned about the cash burn rate of the treasury.”