OKPOLICY.ORG
By Paul Monies
Lower prices and technology advancements have led to big changes in Oklahoma’s oil and gas industry, but raising severance taxes could dampen future development, a research report by the State Chamber of Oklahoma said Wednesday.
Last year, almost 150,000 Oklahomans earned $15.6 billion in wages or self-employment income from the energy industry, the report said. Public education received about $331 million in oil and natural gas severance tax revenue in fiscal year 2015.
The chamber’s research foundation sponsored the report, which was prepared by RegionTrack, an economic consulting firm. It is an update of a report released by the chamber in 2014.
“Looking at both the economic and tax revenue impact of the oil and natural gas industry, we can see that this sector continues to make a huge contribution to Oklahoma,” said Fred Morgan, the chamber’s president and CEO. “As the report update clearly demonstrates, 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.”
The report comes as some have criticized the simplification of gross production taxes passed by the Legislature in 2014. New production is now taxed at 2 percent for the first three years, then rises to 7 percent.
The new tax rates went into effect in July 2015. The earlier tax policy treated horizontal and vertical wells differently and gave incentives to horizontal drilling, which is now the norm in Oklahoma. Some production is still being taxed under the old rates and incentive structure, leading to a mix of tax rates until their qualification period ends.
The chamber report took a three-year average of gross production tax revenue from fiscal years 2013 to 2015 and compared Oklahoma to rates in five other states: Louisiana, Texas, Kansas, Colorado and Utah.
Using the effective gross production tax rate during that time put Oklahoma in the middle of those states at 3 percent. Effective tax rates were higher in Louisiana (6.3 percent) and Texas (3.7 percent), but lower in Kansas (2.8 percent), Colorado (2.2 percent) and Utah (1.6 percent).
“For policymakers, Oklahoma’s current severance tax structure places the state in the upper middle of a large group of peer states and slightly below the dominant producing state, Texas,” the report said. “Recent changes to the severance tax structure will likely raise the average severance tax rate paid beginning in FY 2016.”
Energy tax policy
The Oklahoma Policy Institute has called on elected officials to revisit the state’s gross production tax rates, saying the new rates and other business incentives have contributed to an erosion of the state’s tax base.
David Blatt, the institute’s executive director, said the chamber report amasses a lot of data on the value of the energy industry to Oklahoma’s economy and the state budget. But he said it was unpersuasive that any changes to the gross production tax rate would dry up drilling.
“We have a strong, competitive industry based on our workforce, our infrastructure and our experience,” Blatt said. “With the extent and quality of our reserves, Oklahoma is going to be an attractive place to drill. It was in the past when our tax rate was 7 percent, and it will continue to be if we did away with the tax break we’re offering now to all production.”
Despite two years of lower oil prices and layoffs in the energy business, Oklahoma has remained among the few places where companies are making large capital investments. In the past five years, drilling expenditures in Oklahoma topped $61 billion, or about $12.2 billion a year, the report said. Much of that investment has come in two new plays, the SCOOP and the STACK.
Chad Warmington, president of the Oklahoma Oil and Gas Association, said the chamber report provided evidence that capital flees high-tax environments. He said drilling has fallen in North Dakota, which has one of the highest gross production tax rates.
“With the discovery of two world-class oil and gas plays in the western and southern parts of our state, Oklahoma has some exciting opportunities to continue growing our oil and natural gas production, attracting large capital investments and growing our economy,” Warmington said. “But for the stable, fair tax rate that encouraged E&P (exploration and production) companies to put capital to work to find this reservoir in Oklahoma, our state could be in an even more dire economic condition with no bright light on the horizon.”
Challenge for policymakers
Economist Mark Snead, the lead author of the report, said price volatility makes balancing the state’s need for tax revenue and the desire to encourage industry growth a tough challenge for policymakers.
“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,” Snead said. “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.”
Blatt, with the Oklahoma Policy Institute, conceded getting lawmakers to agree to higher gross production taxes is an uphill battle. He called the current 2 percent rate for three years an “unnecessary and unaffordable giveaway to the industry.”
“We’re not going to fool ourselves into thinking this is going to be easy to do politically,” Blatt said. “The key argument is that we’re facing a chronic and severe budget crisis in the state. If we’re ever going to address that in an effective fashion, then we are going to have to look at the tax breaks we’re giving to oil and gas and to other industries as well. We’ve let too much of our tax base erode.”
Other taxes
Apart from gross production taxes, the chamber report said the energy industry also pays other types of taxes at the state and local level.
Taking fiscal year 2015 as an example, the report said the energy industry paid proportionately more taxes than any other industry in the state. It said the energy industry paid 22 percent of total state taxes, but accounted for 7.4 percent of state employment, 13 percent of state household earnings and 17 percent of state gross domestic product.
“Oklahoma’s oil and gas firms face a relative tax burden that is four to five times greater than the average business in the state on a per-job basis,” the report said.
Oklahomans not in the oil and gas industry also have benefited from the “spillover” effects into other industries, the report said. The annual average spillover was $28.6 billion from 2011 to 2015, meaning about 27 percent of total household earnings were supported by the energy sector.
“Following more than a decade of oil and gas-fueled growth, state per capita income rose steadily to a recent high of 95 percent of the national average in 2014,” the report said. “The turnaround is traced primarily to remarkable earnings growth in the state’s oil and gas industry.”
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