In late March, faced with an $868 million budget shortfall and with few revenue-raising bills passed through the state Capitol, Oklahoma House Democrats crafted a budget plan to repair the state’s revenue problem by reversing specific tax cuts, including for oil and gas production.
In its Restoring Oklahoma Plan, which lays out a strategy for funding a teacher pay raise as well as protecting key government services from further budget cuts, the Democratic caucus determined raising the gross production tax, or severance tax, from 2 to 5 percent would generate an estimated $312 million in state revenue.
“For decades, the state of Oklahoma had a stable tax rate on gross production by taxing wells at 7 percent,” Vinita Rep. Chuck Hoskin told members of the press. “In recent years, the legislature has created more and more tiers and incentives for oil and gas production, including historically low tax rates when a well is at its most productive [time]. … While we understand and agree that oil and gas [industry] is very important to our state’s economy, investing in our children and our infrastructure is mutually beneficial.”
While this isn’t the first proposal floated to increase state’s tax rates on oil and gas production, the idea has found some support among some small oil and natural gas producers and a former state Republican chairman.
“We must face the stark reality that state government is bankrupt,” Keener Oil and Gas owner Dewey Bartlett Jr. said in an Oklahoma Energy Producers Alliance press statement. “We believe the oil industry should stand up and agree that returning the oil and gross production tax to its historical level demonstrates our commitment to help solve this serious state budget crisis.”
During a current legislative session where a budget shortfall looms and the public cries for teacher pay raises and an end to state agency cuts, lawmakers have a daunting task to fill state budget holes by the end of May.
Three years ago, a very different gas production tax proposal was making its way through the State Capitol. With a tax break for horizontal drilling scheduled to sunset in 2015, a bill to keep the tax rate progressed through the House and Senate.
Historically, Oklahoma placed a 7-percent tax on drilling; however, in 1994, lawmakers created a horizontal drilling incentive and lowered the rate to 1 percent for the first 36 months. At the time, horizontal drilling was relatively new, and the incentive helped spur growth in technology. In 2002, the incentive was extended with a 2015 expiration, which would restore the rate to 7 percent.
In 2014, Oklahoma lawmakers passed legislation setting the horizontal drilling tax rate at 2 percent for the first 36 months. Proponents believed the break would keep drilling dollars in Oklahoma and foster economic growth. Opponents argued horizontal drilling was no longer a new technology, so such an incentive was unnecessary.
As the bill headed to the governor for approval, state lawmakers continued to piece together a state budget and plug a $188 million funding hole. In early 2015, the state faced a $611 million budget shortfall. In 2016, the deficit rose to $1.3 billion. Most recent revenue reports estimate the state currently faces a $900 million deficit for the fiscal year that begins July 1.
The newly created Oklahoma Energy Producers Alliance gathered in the grand staircase inside the Capitol and called on lawmakers to restore the gross production tax to 7 percent. The alliance is comprised of small, privately owned oil and gas producers.
“The fact that Oklahoma — a state with prolific oil and gas reserves and the nation’s best oil industry regulatory climate — already has the lowest tax rate in the nation at the historically 7 percent rate should be good enough,” Bartlett said in the press statement.
Days after the oilman visited lawmakers, Oklahoma’s two-term Auditor and Inspector Gary Jones offered his budget solutions. The Republican recommended increasing the gross production tax to 5 percent as well other measures to bring “stability” to long-term revenue planning.
Calls to modify the gross production tax have been met with resistance, especially from a number of the state’s horizontal drillers. The Oklahoma Oil and Gas Association, which represents the state’s largest oil and gas producers, points out the industry, by paying gross production taxes, local property taxes, payroll taxes among others, is the state’s “largest single source for tax funding public services.”
With six weeks left in the session, state lawmakers contend there is still time to pursue new revenue streams for the coming year’s budget, which begins July 1, and not pass a budget with dire cuts to core services.
In recent months, lawmakers have tossed around ideas like increasing the cigarette tax, raising the gas tax, reforming tax credits and expanding the sales tax. Now, jacking up the gross production tax is added to that list.
By the numbers
Oklahoma crude oil and natural gas gross production rates:
>> 1 percent / 7 percent: For horizontal wells that began producing before July 1, 2015, the tax rate is 1 percent for the first 48 months. Then, the rate rises to 7 percent.
>> 4 percent / 7 percent: For deep wells (more than 15,000 feet) that began producing before July 1, 2015, the tax rate is 4 percent for the first 48 months. Then, the rate rises to 7 percent.
>> 7 percent: For wells introduced prior to the horizontal and deep incentive rates, the tax rate is 7 percent.
>> 2 percent / 7 percent: For wells produced after July 1, 2015, the tax rate is 2 percent for the first 36 months. Then, the rate becomes 7 percent.
Source: Oklahoma Treasurer Ken Miller
Print headline: Drilling deep, To help repair Oklahoma’s gaping budget hole, lawmakers and some oil and natural gas producers call for increasing gross production taxes.