It may not look like it matters to most Alaskans, but it does. Not just for the money it would raise for the state treasury, but because it highlights a 45-year-old problem.
A first-year Wasilla senator has introduced legislation to collect state corporate income taxes from Hilcorp, a privately held company that bought out BP’s North Slope assets in 2020. Similar legislation has been introduced in past years but failed to pass.
It’s not that Hilcorp is cheating on its taxes, it’s simply following state law, which has always exempted such privately held businesses from state corporate income taxes.
The federal government and other states with corporate income taxes also exempt such corporations from taxes on their income. But they don’t have the same problem that Alaska created for itself 45 years ago. It’s a problem that few Alaska lawmakers cared about in 1980 when the state was swimming in oil revenues, but which now is pulling the state further underwater with budget deficits.
In all those other states, and with federal corporate income taxes, the profits earned by privately held companies flow through to the owners, who then pay personal income taxes on the money. It doesn’t matter to the IRS or other states — the partners and shareholders pay taxes, it’s just on their personal return, not the business return.
Alaska was the same until the Legislature in 1980 abolished the state’s personal income tax. While a joyful moment for individuals who could live tax free, it meant that a select group of corporations also could live tax free in Alaska. Their owners could pocket the profits free from state income taxes.
It wasn’t that noticeable for a couple of decades, but the visibility grew as more businesses found it easier to incorporate as privately held companies with a limited number of shareholders. A lot of businesses prefer that to setting up shop as a more regulated C Corp., which allows an unlimited number of shareholders but carries with it more regulation. Most of the 22,306 corporations that filed returns in Alaska in 2023 paid no taxes.
Hilcorp was founded in 1989, more than 20 years before it owned anything in Alaska. It started buying up Cook Inlet oil and gas properties in 2011 after long-time producers decided to bail out on the aging and not very profitable fields.
The company’s tax status only became a big issue when it took over BP’s Alaska business in 2020. Instead of depositing BP’s corporate income tax checks, the state could do little but watch as Hilcorp shareholders paid their federal taxes and any state taxes — but nothing to Alaska. Depending on oil-price-driven revenues, that meant between $50 million and $200 million a year less in state revenues.
The bill currently before the Legislature would change state law to apply essentially only to Hilcorp.
And that’s a problem. If the bill makes it into law, it would mean that all the medical practices, labs, imaging associates, law firms, retail, wholesale, commercial landlords and other profit-making businesses in Alaska with a small number of owners would continue to live tax free. As would individual Alaskans.
The problem is bigger than just Hilcorp, though it’s certainly the largest beneficiary. Businesses that benefit from public services, public roads and public spending on development do not pay toward the costs. Individuals who enjoy public services, public roads and public spending do not pay toward the costs either.
Alaska needs to fix it. Collect an income tax from Hilcorp and other businesses as a start, though set the threshold high enough that it doesn’t tax truly small businesses. Then collect from the rest of us and nonresident workers too — that means a personal income tax. The fairest general tax to pay for public services is one that applies to everybody.
Reader Comments(0)