(Corrects ninth paragraph to reflect two Republican senators voted against bill.)
By Yereth Rosen
ANCHORAGE, Alaska, March 20 (Reuters) - Alaska state senators approved a deep cut to oil taxes late on Wednesday, arguing that drastic measures were needed to boost sagging oil production, even if opponents say the cuts could cost the state $1 billion a year in lost revenue.
The bill passed by the narrowest possible margin, 11-9, mostly along party lines, with Republicans in favor and Democrats opposed.
"It was an oil-wealth giveaway of epic proportions," state Senate Minority Leader Johnny Ellis said at a news conference.
The bill eliminates an escalator that hikes production taxes as oil prices rise.
The current system sets a base rate of 25 percent for every $30 per barrel of net profits, but the escalator -- 0.4 percentage points for every $1 per barrel above $30 - pushes the rate far higher when oil prices are high.
While the bill needs approval from the Republican-controlled Alaska House of Representatives, Governor Sean Parnell, who introduced it, issued a celebratory statement. "Today, the Senate took bold action to increase production and fill the pipeline," he said.
The high marginal tax rate is causing the oil industry to flee for more lucrative opportunities in North Dakota, Texas and California, said state Senator Cathy Giessel, an Anchorage Republican, as she reminisced about the oil-boom days.
"I'm interested in seeing that robust economy come back," Giessel argued in floor debate. "This is about the progress of Alaska, our private-sector economy and its potential growth.
But Senator Gary Stevens, one of only two Republican senators to oppose the bill, cited the Exxon Valdez oil spill and other cases of oil-industry scandal and incidents when the industry "cheated" Alaskans.
"This body has decided to place enormous trust in an industry that has often proved itself to be untrustworthy," he said in floor debate.
The bill, if approved by the House, would establish a simple 35 percent tax rate, with $5 per barrel exempted for all produced oil.
It largely upends a tax system called "Alaska's Clear and Equitable Share," or ACES, that was considered the main legislative accomplishment of Parnell's predecessor, Sarah Palin. The one-time Republican vice presidential candidate did not weigh in on this year's tax debate. (Writing by Braden Reddall; Editing by David Cowell and Gerald E. McCormick)