Analysis: The “Novel” Tax Democrat Senators Packed into AK LNG Bill Burdens Small Businesses, Chills Investment

One of the major issues driving debate on HB 381— the Alaska LNG gasline bill— is the Senate’s obsession with passing a tax on “pass-through” entities. Although legislators have frequently referred to this tax as “closing the S-corp loophole,” the current iteration of the tax would apply to any “pass-through entity,” which would include sole proprietorships, partnerships, and LLCs that earn oil and gas-related income in Alaska. The bill would effectively institute a new State income tax on primarily small businesses in the oil and gas industry.

The structure of an S-corp is not a “loophole,” but a way for small businesses to avoid double taxation. A corporation may only be taxed as an S-corp if there are fewer than 100 shareholders, making the structure best for small to medium, local businesses. Rather than pay a corporate income tax, the tax “passes through” to the shareholders, who pay federal income tax on profits when they file their individual taxes. Because Alaska does not impose a State income tax on individuals, shareholders who make profits under an S-corp structure do not pay taxes to the state. This is not a loophole; this is a well-established business structure that strengthens and encourages small to medium businesses.

However, Democrat legislators have been working overtime to dismantle the S-corp structure that protects small-to-medium Alaskan businesses and instead force a particular sector of those businesses to pay an arbitrary State income tax.

According to a presentation by the state’s Department of Revenue on June 27, 2026, the pass-through tax in the current version of HB 381 is “a relatively novel concept and there may be unintended consequences and unforeseen difficulties with compliance and administration.” DOR highlighted difficulties that the new tax poses both for taxpayers and the State administration as well as the “indeterminate” fiscal impact.

F. Steven Mahoney, J.D., C.P.A., an accountant on behalf of Glenfarne Alaska LNG, also raised concerns to legislators regarding the tax on pass-through entities. According to Dr. Mahoney, the new tax is “rushed, targeted, and volatile.” Dr. Mahoney pointed out that there has been “no meaningful analysis on whom and how the tax structure works in practice or application using Alaska’s existing Corporate Income Tax framework.” Additionally, Dr. Mahoney told legislators, “Forcing pass-through entity (PTE) tax into the Corporate Income Tax (“CIT”) structure does not work.”

All in all, Democrats legislators’ attempt to glean off of small businesses involved in the AK LNG project raises genuine concern for taxpayers, project investors, and the State’s administrative staff.

The new tax on pass-through entities would hit sole proprietorships, partnerships, and LLCs that earn taxable income from the production of oil or gas from a lease or property in the state; from the transportation of oil or gas by pipeline in the state; from the supply of oil or gas for transportation by pipeline in the state, whether directly, to an intermediary, or as an intermediary; from gas treatment, carbon capture, or carbon storage activities in the state; from liquefied natural gas processing in the state; from the marine transportation of liquefied natural gas produced in the state. These businesses would be subject to the following bracketed tax rates:

Currently, the House and Senate are working in conference committee to resolve differences between the House and Senate versions of HB 381. The Legislature expects to vote tomorrow, July 1, 2026, on the final version produced in conference committee.

Full bill text: HB0381F