Oklahoma Poised to Contest Potential O&G Tax Increase Proposals

As the state of Oklahoma once again faces a budget shortfall of about $900 million, lawmakers are looking to find ways to create new revenue, including eyeing potential new taxes on the state’s oil and natural gas industry. Meanwhile, oil and natural gas trade organizations and the State Chamber of Commerce are reminding legislators that the oil and natural gas industry is a key economic driver in Oklahoma, and that the state’s competitive gross production tax rate has boosted, promising new exploration and production in the state’s SCOOP and STACK plays.

Last fall, the State Chamber Research Foundation issued an updated Economic Impact of the Oil & Gas Industry on Oklahoma report that confirms the state’s current gross production tax, which was raised in 2015, has created stability in Oklahoma’s market that other higher-taxed states, other than Texas, have not seen in the two-year commodity price downturn.

Economic Impact Report Shows How Much Oil and Gas Contribute

The foundation’s report issued in late September 2016 shows that almost 150,000 Oklahomans earned about $15.6 billion in wages or self-employment income from oil and natural gas activity. It also shows that the industry supports an estimated $28.6 billion in additional spillover output of goods and services in other industry sectors statewide.

“Even with the drastic price reductions we’ve seen in the past couple of years, oil and natural gas is still the most important contributor to economic growth in Oklahoma,” State Chamber President and CEO Fred Morgan said when the report was released.

Other economic factors for 2015 found in the report include:

• Oil and gas companies paid $1.7 billion in royalty payments to Oklahomans in 2015.

• Each oil and gas job supports two additional jobs in the state, and that jumps up to four additional jobs in rural areas.

• Millions of gross production tax dollars are dedicated to schools and local governments every year.

• Despite the downturn in prices, the oil and gas industry continues to be a significant funder of education. The industry generated $542.1 million in net severance taxes in fiscal year 2015. Of that amount, $328.7 million went to dedicated uses, with education’s $224 million as the largest share.

“For policymakers, the volatile and ever-changing environment for oil and natural gas makes balancing the need for tax revenue with the desire to foster growth in the state’s trademark industry more challenging than ever,” says Dr. Mark Snead, Economist and President of RegionTrack, who conducted the study.

“The oil and natural gas industry remains the largest single source of state tax revenue, and important shifts have taken place in the types and amounts of taxes paid by the industry. The channels of economic influence on the state economy have also changed, as ownership and investment in the industry are now as important as employment and wages as a source of economic stimulus.”

Democrats Want to Increase State’s Gross Production Tax Rates

The Oklahoma Policy Institute (OPI), a progressive Oklahoma tax policy organization, has been critical of the gross production rates paid by the oil and gas industry since horizontal drilling has been responsible for Oklahoma’s oil and natural gas production growth.

In 2014, the Legislature simplified the gross production tax and raised the gross production tax rate on the initial months of horizontal production. Since the mid-1990s, horizontal wells were taxed at 1 percent for the first 48 months of production and 7 percent for the remaining life of the well.

When the Legislature passed HB 2562, that initial rate on horizontal wells was increased to 2 percent for 36 months and then 7 percent afterward, effectively raising taxes on oil and gas production by 100 percent in the first 36 months and by 600 percent starting in the 37th month. Since July 2015, all new production is being taxed at the higher rate.

The production tax changes in 2014 also sunset a number of tax exemptions and created a permanent tax rate for all oil and gas activity.

However, in a policy statement following the conclusion of the 2016 legislative session, OPI called on lawmakers to consider indexing the gross production tax to the price of oil, adopting a 4 to 5 percent tax when prices are lower and a 7 percent tax when oil prices are high.

Democratic State Rep. Scott Inman, who is said to be a possible 2018 gubernatorial candidate, and several other Democratic lawmakers are embracing that suggestion. Inman says Oklahoma made a serious mistake by not implementing a higher gross production tax on the oil and gas industry when the rate was up for renewal in 2014. Inman has introduced HB 1632, which imposes a gross production tax graduated scale tied to the price of oil and natural gas.

Arnella Karges, Executive Vice President of the Oklahoma Oil & Gas Association (OKOGA), says such a policy would bring uncertainty not only to oil and gas producers in the state, but to the state budget as well. “That’s risky for state appropriators in that it makes the state budget even more volatile,” Karges says.

OKOGA is also critical of increasing the rates just as commodity prices are making exploration and production more palatable in Oklahoma.

One hurdle for any new revenue measures is they must receive three-fourths approval in both houses to move to the Governor. The Oklahoma Legislature is overwhelmingly Republican, and most legislators understand that state tax rates impact where the oil and gas industry chooses to invest in oil and gas production, Karges says.

Recent State Treasurer reports show that while revenue from oil and gas is still weaker than two years ago, oil and gas gross production revenue has been on the rise. In his January 2017 report, State Treasurer Ken Miller said that for a second month, tax collections from the production of oil and natural gas exceeded collections from the same month of the prior year. In November 2016, gross production taxes generated $34.1 million, up by $3.9 million, or 12.9 percent, from November 2015.

Sales Tax on Services Could Hurt Oil and Gas Service Providers

One significant issue the oil and gas industry could face in the upcoming session is consideration of a sales tax on services, Karges says. OKOGA is preparing for SB 331, a measure that repeals Oklahoma’s sales tax exemption on repair, maintenance, delivery and installation of taxable goods, which are taxed in 24 other states.

Sen. David Holt, a Republican who wrote the bill, said it could be expanded to include items that are taxed in at least a dozen states nationally or most surrounding states, including oilfield services, construction services, information services, data processing, automotive leases, and more.

“The American economy has evolved, and government has to modernize with it,” Holt said in introducing the bill. “There are a number of items that are taxed in many other states that have gone untaxed in Oklahoma for no reason other than having a good lobbyist or because the nature of the economy has changed. I drafted SB 331 to include the one item already mentioned, but view the bill as a potential vehicle for a much broader modernization of our sales tax code. I am very hopeful that the business community will come to the table and propose an equitable combination of items that spreads the burden fairly, so that our state’s education system can improve.” Karges says this new tax proposal “could be a big price tag for the oil and gas industry, just as we are trying to ramp up production in the SCOOP and STACK.”

Trump Election Gives Oklahoma Producers Hope

The election and inauguration of Donald Trump as the 45th President of the United States has boosted the spirits of oil and gas producers who are anticipating more favorable tax and regulatory environments for the industry. In particular, the nomination of Oklahoma Attorney General Scott Pruitt to be the director of the Environmental Protection Agency is a welcome move. As Attorney General, Pruitt has been a dogged critic of the EPA and has enacted several lawsuits challenging overzealous EPA regulations he considers detrimental to Oklahoma’s business climate.

OKOGA and the Oklahoma Independent Petroleum Association issued a support statement for Pruitt’s confirmation. “For the past eight years, we’ve seen executive overreach put increased, unnecessary and burdensome regulations in place to the detriment of not just Oklahoma’s oil and natural gas industry, but industries across the state and nation,” said Jeffrey McDougall, OIPA Chairman. “As Attorney General, Scott Pruitt has been a consistent challenger to overreaching EPA regulations, and his appointment will change the course of how the EPA is utilized by the White House administration.”

OKOGA President Chad Warmington said, “As Oklahoma’s Attorney General, Scott Pruitt has proven that he is a legal expert, which is exactly what our nation needs at the helm of the Environmental Protection Agency. … We are excited about having an Oklahoman in a prominent role of a Trump administration and we welcome a more measured regulatory approach at the EPA that will give a voice to all.”

The industry also applauded other nominees with ties to the oil and gas industry, including former ExxonMobil CEO Rex Tillerson’s selection as Secretary of State and former Texas Gov. Rick Perry’s selection as Energy Secretary.

 

About the author: Cindy Elliott Allen is a veteran Oklahoma journalist who has spent most of her career as a reporter, editor and publisher of community newspapers in Oklahoma, Arkansas and Kansas. She most recently has concentrated on writing about the oil and natural gas industry and has served as a Communications Specialist for Devon Energy and as a Strategic Communications Adviser for the Oklahoma Oil & Gas Association. She also writes about public policy and politics on her blog, www.conservativemakingsense.wordpress.com.