Palin unveils plan to replace questioned oil tax

ANCHORAGE, Alaska, Sept 4 (Reuters) - Alaska's scandal-tainted oil-tax system should be replaced by one that combines elements of the state's old, simple oil-production tax and modern investment incentives, Gov. Sarah Palin said on Tuesday.

She was unveiling the new tax plan that she wants lawmakers to adopt in a special session starting next month, Palin called the session because she said the state's new Petroleum Profits Tax (PPT), approved in 2006 by the legislature at the urging of then Gov. Frank Murkowski, is flawed and clouded by suspicion.

Palin's proposal includes a variable tax rate that is higher than that approved last year, and opportunities for investment credits are narrower. But she said the result would be better for both the citizens and for new investment.

"We're not anti-oil. We want to make sure that the golden goose is fed and not killed," the Republican governor said at a news conference. "At the same time, we want to continue to remind Alaskans who owns the resource, and that is Alaskans, that we deserve a fair return for our non-renewable resource."

Oil revenues, including royalties, taxes and fees, make up about 85 percent of the state's general government revenues.

The PPT, which replaced a simpler levy on gross production, is now a subject of a wide-ranging federal criminal probe into political corruption. Two former oil executives have confessed to bribing state lawmakers for industry-favorable votes on the matter; the trial of two of them is set to start on Wednesday.

Aside from the corruption scandal, Palin said last year's oil-tax rewrite must be replaced because it has failed to bring in the predicted revenues or new investment.

Her proposal combines a 10 percent tax rate on gross production at Alaska's huge legacy fields, Prudhoe Bay and Kuparuk, with a 25 percent tax on net profits, which would increase as oil prices rise, and targeted investment credits.

Doug Suttles, president of BP Plc's (BP.L) BP Exploration (Alaska) Inc, defended the current system.

"The net structure did encourage investment, but the rate was already too high," Suttles told an Anchorage television station. "This looks like an increase."

The governor said she reluctantly changed her previous position, which had favored a straight gross-production levy. Detailed analysis showed taxing only gross production, as the state had done before, would discourage investment in costly heavy-oil development or other economically challenged fields.

"Given this our experts are convinced that we need to offer something better, more creative and more intelligent," she said.

One critic said Palin's plan relies too heavily on taxing declared oil company profits, inevitably giving the companies the chance to cheat the state through creative accounting.

"If all we're doing is reconstituting the old PPT at a little higher rate, if all we're doing is just tweaking around the edges, it's still just putting lipstick on a pig. Because PPT is a pig," said state Rep. Harry Crawford, an Anchorage Democrat who attended the news conference. "I think a straight tax on the gross is so much simpler and easily verifiable."

But House Speaker John Harris said he believes Palin's plan is likely to win legislative approval.

"I think it's going to be difficult for legislators not to support this concept. In my opinion, it's not a huge difference from what we did before," said Harris, a Valdez Republican.

Reworking the oil tax is important for assuring Alaskans worried by the corruption taint, he said. "I think the governor probably understands the views of the public," he added.

The special session is scheduled to start on Oct. 18.