State Tax Day - Current, S.1, Alaska—Severance Tax: Anchorage Responsible for Natural Gas Production Tax Obligations, (Apr 23, 2026)

A dispute arose over how to calculate tax credits for the Municipality of Anchorage’s natural gas production. Alaska law taxes the production of natural gas, while also allowing gas producers to claim tax credits based on the costs of producing that gas. The law’s formula for calculating tax credits entails subtracting certain production costs from the amount of taxable gas produced and the law defines what gas is taxable for these purposes. The tax credits are intended to create incentives for gas producers to invest in producing more gas. When the dispute began, the Municipality owned one-third of a natural gas field in Cook Inlet. It used most of that gas to make electricity for its residents, selling only small amounts to third parties. A law specific to municipal governments provided that the Municipality had to pay production taxes on only the amount of gas it sold to others yet was eligible for tax credits “to the same extent as any other producer.”

When the Municipality applied for tax credits, it calculated them based on costs for producing all of its gas against the very small amount of gas it actually paid taxes on and this calculation yielded sizeable tax credits. The Department of Revenue rejected this calculation and took the position that the tax credit calculation should be based on the value of all the gas it produced, which met the statutory definition of taxable, even though most of this gas was not actually taxed under the special rule for municipalities. Therefore, it awarded the Municipality tax credits in far smaller amounts than the Municipality had claimed. The superior court affirmed the Department’s decision and the Municipality appealed to the Alaska Supreme Court. The state Supreme Court affirmed the superior court’s decision denying tax credits claimed by the Municipality regarding natural gas production. The state Supreme Court determined that the Department’s interpretation of the relevant tax statutes was reasonable and consistent with legislative intent and the Municipality remained responsible for the tax obligations at issue.

Municipality of Anchorage v. Alaska Department of Revenue, Supreme Court of Alaska, No. #S-18923, April 17, 2026, ¶200-637