Big Oil is set to make a lot more money in Oklahoma, why can’t it pay more taxes? (Tulsa World)

By Wayne Greene

The critical issue behind all of the recent turmoil at the state Capitol — and one of the keys to a revenue solution for Oklahoma — is the gross production tax.

That’s the tax the state applies to natural gas and oil, and, despite its critical place in the current political climate, it’s not well understood.

We all learned the reality of the sales tax the first time we bought a pack of gum as kindergartners, and the income tax is obvious to anyone who gets a paycheck.


But the gross production tax is a more mysterious thing to most people: Something that someone else pays, although we’re not sure how or how much.

Here’s some things you should know about gross production taxes:

• It’s often said that the “historic” gross production tax rate is 7 percent, but that’s not altogether right. It was 5 percent until 1971 and in contemporary history the state has chronically used incentives and rebates to encourage different parts of the industry.

• Currently, the gross production tax rate is 2 percent for the first three years of production and then 7 percent. A lot of a well’s money-making potential comes in the first years of its life. That’s particularly true of horizontal wells.

• Oklahoma’s gross production tax rate is low. A recent study by the Idaho Department of Lands looked at the effective tax impact of gross production and property taxes in nine oil states. Oklahoma’s effective rate was 3.2 percent, the lowest. The higest rate was in Wyoming, 13.4 percent. In Louisana its 13.3 percent. Alaska, Montana, North Dakota, Texas, Utah and Idaho also had higher rates than Oklahoma. The Texas rate is more than double Oklahoma’s.

• Despite what you might have heard on attack ads, gross production tax rates aren’t all that decisive in decisions about where and when to drill for oil. Geology, the price of oil or natural gas on the market and the availability of labor are all more important.

There’s another related issue quietly working its way through the state Capitol that ought to color everyone’s thinking on this issue.

The Legislature is on the cusp of making a handful of Oklahoma oil barons and out-of-state investors a lot richer, and that’s a perfect rationale for raising the gross production tax rate.

Senate Bill 284 would allow big oil companies to drill long laterals in all geological formations. It’s proven technology that will create wealth more efficiently, and there’s nothing wrong with doing it.

Versions of the bill, which was written by Senate President Pro Tem Mike Schulz and coauthored by Speaker of the House Charles McCall, have passed by strong margins in the state House and Senate. Potentially, the bill could be on the governor’s desk at any moment.

If approved, it would mean a lot of money for a lot of people who already have a lot of money.

An industry insider tells me that the cost of drilling one 10,000-foot horizontal well instead of two 5,000-foot horizontal wells is $2.5 million to $3 million less. A little less oil comes out the other end for technical reasons, but it’s still a huge cost saving.

You can do the math and see how fast $2.5 million to $3 million a pop translates into some real money for the big wheels of Big Oil.


With that kind of money on the table, doesn’t it make sense that the state would get a higher tax rate from it?

(There are some real costs to the state as a result of longer laterals. Fewer people would have jobs on one well than would have been working on two, and oil is, after all, a resource that runs out over time.)

Big Oil wants something from the state — long laterals — and the state deserves something in return, higher gross production tax rates.

This is an important note: Gross production taxes aren’t the unique solution to Oklahoma’s budget problems. Tax experts Jerry Johnson and Michael Clingman ran some numbers for the Oklahoma Policy Institute, a big proponent of higher gross production tax rates. They found that if the state raised the tax rate to 7 percent on all wells, including those already in production, the result would be $313 million more revenue for the state next year.

That’s a lot of money, but not in comparison to the $878 million the state needs just to stand still.

And standing still only funds things at their current inadequate level.

If the state is ever to make real progress on public school funding and restoring basic services it will take a broad-based set of tax measures, including things like fuel taxes, cigarette taxes and restoring some of the income tax cuts the state has foolishly implemented.

But there’s no reason gross production taxes couldn’t be part of that mix. In fact, given that the state is about to make Big Oil a whole bunch bigger, it should be.

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