Source: OK Policy Note: Gross production tax revenues are from production months, two months prior to date of tax remittance

This article appeared in the April 2012 edition of the Oklahoma Economic Report, a publication of the Office of State Treasurer Ken Miller. It is reprinted here in its entirety with permission.

It seems that each day brings another story of record low natural gas prices and record high supplies. A warmer-than-normal winter in the United States drove down natural gas demand this year at a time when prices usually rise and supplies are reduced.

As a result, natural gas in storage is at or near record levels while prices are at their lowest in more than a decade. The U.S. Energy Information Administration (EIA) estimated natural gas in storage at the end of March at 2.48 trillion cubic feet, about 57 percent higher than at the same time last year.

According to Bloomberg, the average spot price in April at the Henry Hub in Louisiana was $1.99 per thousand cubic feet (mcf) as of April 27. Read the rest of this entry »

In the final days of the 2010 session, when legislative leaders were faced with historic revenue shortfalls and were desperate for ways to balance the budget, a deal was struck with representatives of the energy industry on oil and gas drilling incentives. The industry agreed to defer payment of credits on horizontal and deep well drilling for twenty-four months, until July 2012, and then to pay out over the next three years the credits that accrued during this period. In return, the legislature adopted several changes to how drilling is taxed that were sought by the industry .

At the time, it was anticipated that deferring the payment of credits on horizontal and deep well drilling for two years would put the state on the hook for $150 million. Instead, when oil and gas companies submitted their claims in late 2011, the price tag turned out to be nearly double: $297 million. The state now must pay out close to $100 million annually between 2013 – 2015 for credits accrued in 2010 and 2011, leaving less money than expected for state appropriations. These back payments are in addition to credits that are accruing for current production

The announcement that tax breaks for horizontal and deep well drilling amounted to nearly $150 million per year in 2010 and 2011  should serve as a wake up  call to Oklahoma policymakers and the public. All evidence points to horizontal drilling accounting for a substantially greater share of Oklahoma oil and gas production in the years ahead.  The generous tax treatment we provide this form of drilling threatens to compound our budget woes and hamper our efforts to provide adequate funding of core public services. Read the rest of this entry »

In her first State of the State speech, Gov. Fallin said, ”Our course of action will be simple: only tax credits that create jobs will stay. For instance, my budget begins the process of restoring the Aerospace Engineer Tax Credit, which brings good, high tech jobs to Oklahoma. But those tax credits that do not create jobs must be eliminated.”

Reinstating the aerospace credit was among the Governor’s top goals this year, and she made good on that promise early in the session. Unfortunately, eliminating tax credits that aren’t worth the cost did not seem to be as much of a priority.

While some positive steps were made over the legislative session to increase transparency of tax credits, we have seen no credits permanently taken off the books. On the contrary, several tax credits and exemptions were added or extended. Read the rest of this entry »

What’s up this week at Oklahoma Policy Institute? The Weekly Wonk is dedicated to this week’s events, publications, and blog posts.

This week OK Policy released a fact sheet on gross production tax exemptions.  Gross production of oil and gas is normally taxed at seven percent, but various types of production are fully or partly exempt from the tax.  Monday’s blog post, “I don’t need it but I’ll take it,” ponders the fiscal wisdom of handing out tens of millions of dollars in exemptions when even oil industry executives admit the breaks are of the least importance in their decision to drill.  The Tulsa World reports on OK Policy’s research and the millions in lost revenue from oil and gas exemptions.

Tuesday’s blog highlighted legislative efforts to rescind higher education benefits for undocumented students.  Two bills working their way through the legislative process seek to turn back the clock by repealing a 2003 law that allowed undocumented Oklahoma high school students to be eligible for resident tuition status at public colleges and universities.  Despite the claim that tax-payers are subsidizing ‘illegal aliens,’ the amount in tuition and fees paid into the higher education system by undocumented students – $1,074,693 between 2005 and 2009 – far exceeded the amount the state waived for in-state status ($254,026). Read the rest of this entry »

A recent news report examining proposals to limit the federal tax deduction for charitable giving concluded with a comment that gets to the crux of the debate over tax breaks:

As one donor explained, he doesn’t give to charity to get a deduction — but he’ll take it if it’s there.

It seems as though Oklahoma oil and gas producers think the same way.

State tax breaks ranked last among 10 variables cited by Oklahoma oil industry executives as affecting their decision to drill, according to the findings of  a non-scientific 2008 survey by Oklahoma City University economics professor Steven Agee. However, most producers will gladly take them when they’re there: Agee found that 83 percent of respondents had claimed a gross production tax rebate. Read the rest of this entry »

Yesterday, State Finance Director Preston Doerflinger announced state General Revenue (GR) collections for February.  The news was generally positive. February’s collections came in 12.0 percent higher than one year ago; this was the eleventh straight month that monthly GR collections were up compared to the prior year. However, February’s growth was not quite as robust as that seen in January, when collections rose by 19.5 percent. Read the rest of this entry »

In their efforts to find additional revenues for the upcoming budget year, legislative leaders and Governor Henry took some strong and politically risky steps to suspend tax credits for various forms of economic activity. But when it came to tax incentives for the oil and gas industry, expected to amount to some $150 million in FY ’11, it was the industry that seemed to have the upper hand. HB 2432, which passed in the final days of session, allowed the state temporarily to defer incentive payments to oil and gas producers – but only in return for some permanent and questionable concessions to the industry. Read the rest of this entry »

House Speaker Chris Benge this week was joined by Republican Senator Patrick Anderson and Democratic Senator John Sparks in unveiling a proposal to create a new budgetary reserve fund to help cushion the state from a repeat of the extreme revenue volatility seen in recent years. The proposal, introduced as a committee substitute for the Speaker’s bill HB 3032, is for gross production tax collections exceeding a 3-year moving average to be set aside into an Energy Stabilization Fund. When gross production taxes fall below their 3-year average, revenues would automatically flow back to the General Revenue Fund. In addition, interest from the Fund’s principal would be dedicated to enhanced energy recovery research.

Read the rest of this entry »

This month’s announcement of December General Revenue collections didn’t seem to provide much in the way of good news. Revenues for the month again came in around 30 percent below levels of one year ago (graph) and 30 percent below the certified estimate upon which this year’s initial budget was developed (see our Budget Hilites for an overview of the state’s budget situation).

Read the rest of this entry »

As state leaders struggle to find solutions to this year’s revenue shortfalls and funding gaps, it is not too soon to draw lessons from the current state fiscal crisis to design policies that will allow us to respond better the next time the economy falters. This post, the second in a four-part series that will recommend changes to our budget and tax system, looks at options for strengthening our budget reserve funds.  Our first post recommended enhanced and expanded budget forecasting; subsequent pieces will consider multi-year revenue commitments and tax expenditures. Together, our proposals are designed to improve the Legislature’s ability to manage budget downturns.

Like most every state, Oklahoma has established a budget reserve fund to put money aside during times of robust growth that is then made available to cushion the impact of economic downturns.  Oklahoma’s Constitutional Reserve Fund, known as the Rainy Day Fund (RDF), was created by a vote of the people in 1985. Under the Constitution, deposits are made into the Rainy Day Fund of all General Revenue (GR) collections that exceed 100 percent of the final certified estimate made by the State Board of Equalization for a given year. Deposits are capped at 10 percent of the General Revenue Fund certification for the preceding year.  If the RDF is already at its cap, additional surpluses spill over to the General Revenue Fund. Read the rest of this entry »