Battle Over Oil And Gas Tax Central To Oklahoma Budget Shortfall Starts Monday
The fight over Oklahoma’s 2017 budget shortfall could lead to a pair of tax increases, including the state’s gross production tax rates on oil and gas, beginning next Monday.
Gov. Mary Fallin (R) ordered the state legislature back to work after Oklahoma found itself with a $215 million budget shortfall after the Oklahoma Supreme Court ruled a tobacco tax passed this year was unconstitutional.
On the table is a possible rate hike on the state’s gross production tax, a revenue stream and “primary driver” that has boosted the state’s recovery, according to the state treasurer, Ken Miller.
“Now is the exact wrong time to raise taxes on the oil and gas industry when recovery is underway,” Chad Warmington, President of the Oklahoma Oil and Gas Association, told Western Wire.
“Oil and gas companies are very supportive of education and would like to see teachers get a pay raise,” Warmington said, by broadening the tax base rather than “killing the golden goose.”
“Oklahoma’s economic recovery, slow and steady, continued through August,” Miller said in his September bulletin. “The energy sector remains the primary driver of the state’s economic expansion as evidenced by the continued rise in oil field employment and gross production tax payments.”
“August gross production tax collections are higher than the prior year for an eleventh consecutive month,” Miller reported. A month earlier Miller attributed the state’s recovery and expansion in revenues to receipts derived from the gross production tax, saying, “growth in gross production collections is driving the shrinking margin” in gross receipts.
Warmington also said oil and gas tax revenues make significant and meaningful contributions to the state’s educational system.
“When you look at where education gets its funding from, it’s largely oil and gas revenue,” said Warmington. “The first $150 million in gross production tax revenue, off the top, goes to the education fund.”
OKOGA pointed to two tax increases passed in the 2017 legislative session yielding $141 million in additional revenue that ended gross production tax rebates and installed a two-tier gross production tax structure and an increase in the rate on more than 5,700 producing wells with drill starts before the present two-tier system.
Warmington told Western Wire the oil and gas industry has been the go-to, stopgap source for addressing budget shortfalls and generating state funding for the past three years with a “roughly 300 percent” increase in taxes on producing wells.
And that would continue with an increase in the gross production tax credit for new wells in their first 36 months of operation. Suggestions include raising the rate from 2 to as much as 7 percent in this category.
“They’re offering it as a solution to all the state’s problems,” Warmington told Western Wire.
“It’s the wrong solution. The reason the state is in trouble is because we lost 20,000 people in the oil and gas business, prices collapsed by two-thirds, and our rig count was decimated by 55 percent,” Warmington said. Despite persistent lower prices, the rig count in Oklahoma has recovered significantly to approximately 130 statewide, according to Warmington.
“The oil and natural gas industry is the single largest tax contributor to the state budget, and this is the third year in a row the state will further increase its dependency on the industry with additional tax increases,” added Warmington.
“What they really need to focus on is incentivizing drilling, because that’s what drives our economy,” he said.
“We’re still one quarter of all state revenue derived from one industry,” Warmington added. “It’s counterintuitive to tax something you want more of,” Warmington said, noting that the proposed cigarette tax was intended to curb smoking.
“You raise taxes on something, you get less of it,” he concluded. Warmington said that the state’s large oil and gas producers wouldn’t be forced to leave the state, but would be less likely to drill new, marginal wells that would actually add to the tax collection under the current two-tiered system.
According to OKOGA, the oil and natural gas industry “pays the following state and local taxes: petroleum excise tax, state land office mineral revenue tax, state sales and use tax for industry sales, state sales and use tax for industry purchase, corporate income tax, personal income taxes, energy resources revolving fund tax, marginal well tax, GPT, local property taxes, and local sales and use tax.”
But addressing the budget gap is not the only item on the governor’s to-do list for the legislature. Among the issues Fallin ordered for next week’s special session are calls for consolidation and efficiencies in Oklahoma state government, clarifying a sales tax on vehicles, potential pay increases for school teachers, and seeking “a long-term solution to the continuing budget shortfalls.”
Should the legislature fail to reach a three-quarters vote on another tobacco tax or a hike in gross production tax, the measures will go to the people for a November vote.
“I think it’s an appropriate response if something can’t get three-quarter votes to send it to a vote of the people and I think that’s something both parties agree to,” House Majority Floor Leader Jon Echols (R-Oklahoma City) told News9.
Oklahoma Republicans like House Speaker Charles McCall ( R-Atoka) acknowledged revisiting the cigarette tax, but said a tax-only solution might not be palatable to Oklahoma politicians or the state in general.
“In the event House Democrats refuse to support the measure, as they have consistently done, the House will likely send the cigarette tax to a vote of the people,” McCall said in a statement. He added, “While the House is certainly willing to look at government consolidation as a way to reduce costs and increase efficiency, we have no intention of raising taxes on Oklahoma families and businesses just for the sake of growing government.”
But State Rep. Matt Meredith (D-Tahlequah) told the Tahlequa Daily Press that members of both parties were searching for “renewable cash streams.” That includes raising the gross production tax, either at special session or later, through a vote of Oklahomans.
The Oklahoman’s editorial board finds the prospects for meaningful resolution to any of the issues during the $30,000-per-day special session to be slim. State Democrats like House Leader Scott Inman (D-Del City) suggested a cigarette tax would be a possibility if higher rates for gross production are also part of the conversation.
That may be because Oklahoma voters find tax increases, especially on the state’s oil and gas industry, harmful to the state’s jobs and overall economy.
Pat McFerron, an Oklahoma pollster, released a report to TheOkie this week that indicated a lack of appetite for raising taxes on the oil and gas industry, with 52 percent of those polled agreeing that such a move would hurt jobs and Oklahoma’s economy. More than 81 percent said that “it is important Oklahoma creates and maintains a business climate where the oil and gas industry can protect and grow jobs in the state.”
McFerron pointed to Oklahomans’ reticence to pass tax measures, especially those on oil and gas. When voters are reminded that the state is already heavily dependent on oil and gas revenues, McFerron says, support for further tax increases drops.
“Voters know this, so even the simplest reminder causes voters to move dramatically,” said McFerron. “Additionally, voters quickly realize that taxing this industry damages other parts of our economy which directly or indirectly support the industry. Voters quickly recognize that it is not just oilﬁeld suppliers who would be hurt, but all businesses in the state, should oil and gas production decrease at all.”