By Gaby Galvin
In Oklahoma, oil drillers have reaped the benefits of the lowest effective tax rates in the nation while the state’s schools have struggled to keep their doors open.
As U.S. oil patches boomed between 2008 and 2014, oil and gas companies prospered in energy states such as Oklahoma, one of the top oil and gas producers in the nation. Several oil-dependent states began stashing away millions of dollars in production taxes then – but in an effort to draw more business, Oklahoma kept taxes low on some wells instead.
And as the boom went bust and other oil-dependent states dipped into deep “rainy day funds,” Oklahoma found its coffers nearly empty, with a $878 million budget deficit this year.
Now, despite an uptick in the energy sector this year that will likely help alleviate some of Oklahoma’s budget concerns, state lawmakers and industry proponents have remained deadlocked on whether to raise the production tax on wells.
Industry leaders say the tax incentives have boosted drilling in Oklahoma and that raising the tax rates would detract from that. But opponents say the credits have done their job bringing business in and now stand to hurt funding for public services such as health care and education.
A significant share of the oil and gas production tax goes toward funding Oklahoma’s education, whether K-12, higher education, tuition scholarships or directly to school districts. (The rest helps fund the state’s infrastructure, tourism and other public programs.)
“I think Oklahoma parents and citizens alike are really taking [education cuts] to heart,” says Shawn Hime, executive director of the Oklahoma State School Boards Association. “And I think the crisis we’re seeing now with our budget and our revenue-raising measures … is what it’s going to take for legislators to put partisan issues aside and come up with a plan that works long term for Oklahoma.”
‘At the End, Oklahomans Lost’
Oklahoma’s schools have been hit particularly hard in recent years by the state’s budget crisis, caused in part by a downturn in the energy sector that Michael McNutt, communications director for Gov. Mary Fallin’s office, called “unprecedented.”
General formula funding – the primary state funding source for schools – was slashed nearly 27 percent between 2008 and 2017, according to an analysis by the Center on Budget and Policy Priorities, despite the state gaining about 50,000 students since then. If cuts continue, resources will be stretched even thinner: The U.S. Department of Education projects that an additional 41,000 pre-K through 12th grade students will join the state’s cash-strapped education system over the next decade.
“School boards are now having to make the decisions of cutting fine arts courses, Advanced Placement courses, and elimination of some of those courses we would all like to see expanded to help our best and brightest students and our students with special interests,” Hime says.
Oklahoma slightly increased its per-student spending to $8,082 between 2014 and 2015, the most recent year for which data are available. But only three states spent less per student – Arizona, Idaho and Utah – and the national average was $11,392 per student, according to U.S. Census figures. (Oklahoma ranks 32nd for education and 44th overall in U.S. News’ Best States rankings.)
In an attempt to cut costs in recent years, nearly 100 of the state’s 513 school districts have shortened their school weeks to four days, and at least 44 others are considering similar measures, the school board association found in a survey released in April. But the state’s education department found no evidence that four-day weeks save districts a significant amount of money, and student outcomes in these districts are suffering as a result. Some schools have also increased class sizes, cut after-school programs or shuttered altogether.
“When you cut those programs, your number one expenditure is personnel-related,” Hime says. “All the way down to the early elementary grades, we see class sizes soaring in Oklahoma districts, which is a real disappointment because you know that individual attention from a teacher means an awful lot to our youngest students.”
And while Hime says he felt optimistic about lawmakers’ dedication to increasing education funding as the 2017 legislative session began in February, “political squabbling” prevented any meaningful change.
‘Schools Are Certainly Polarized’
Amid the state’s budget crisis, one Oklahoma industry is particularly notable as it supplements some of the missing school funding: oil and gas.
The Oklahoma Energy Resources Board, created in 1992 as a privatized state agency, is funded by a voluntary one-tenth of 1 percent tax on all oil and gas produced within the state. The board’s budget – more than $15.7 million in the 2017 fiscal year – funds two major initiatives: the restoration of abandoned well sites and education, mainly through K-12 programs and curricula as well as advertisements and public service announcements. (The OERB has restored more than 15,000 abandoned and orphaned well sites since 1994.)
To date, the board has spent more than $40 million on education programs, with about $2.3 million directly funding K-12 curricula in 2016, according to Executive Director Mindy Stitt. About 98 percent of school districts take advantage of the OERB programs, which include teacher workshops, free lesson plans and museum trips – as long as trips feature an oil and gas exhibit.
The free OERB lesson plans use examples from the oil and gas industry to teach math and science, and Stitt said via email that teachers should use them to supplement their existing curricula. Some of the science topics the lessons touch on include geology, motion and force, kinetic energy and recycling, and the curricula meet Oklahoma’s Academic Standards.
Among the free OERB teacher resources is a video series titled “Lab Time with Leo,” a goofy Bill Nye the Science Guy-esque character who explains the science and mechanics of oil drilling.
“Our mission is to use the strength of one of the state’s largest economic drivers to improve the lives of Oklahomans through the education and well site restoration initiatives,” Stitt wrote. “We pride ourselves on the educational integrity and quality of the curricula, activities and supplies we provide.”
The board’s principal objective has always been to promote the oil and gas industry, and while Kansas, Ohio, Illinois and Wyoming have or have considered similar oil promotion boards, Oklahoma’s is the largest, an NPR investigation published in June revealed. Stitt said the OERB has trained more than 15,000 teachers in its workshops, and its website says it has reached more than 1.9 million students.
Proponents of the board are grateful for the free teaching resources in Oklahoma’s cash-strapped school system, but critics question the ethics and educational merit of science materials provided by the oil and gas industry, a major contributor to climate change and air pollution.
Charles Anderson, a Michigan State professor who studies environmental literacy, told NPR that by focusing heavily on the benefits of oil drilling and ignoring climate change, the OERB materials tell only “half the story.”
“The children of Oklahoma are getting a raw deal – they are getting educationally ineffective materials teaching content that will be of little use to them if they want to leave the state,” Anderson told NPR.
But Hime, the school board association director, says he has faith in Oklahoma’s educators to ensure they are presenting students with unbiased materials.
“We have groups all the time that would like to give you information or materials that lean one way or another,” he says. “And our schools have a really thorough process they use in vetting those, and then running them up the chain of command before actually using them with students.”
Lawmakers in several states, including Oklahoma, considered “academic freedom” bills this year that would allow teachers to “teach the controversy” of scientific topics such as evolution and climate change. Although more than 95 percent of climate scientists say climate change is caused by humans, nearly one-third of middle and high school science teachers in the U.S. who teach climate change have suggested it is naturally occurring, according to a 2016 study published in Science magazine, and one-quarter have spent just as much time contesting evidence of climate change as they have teaching it.
Nils Peterson, a professor at North Carolina State University whose research focuses on environmental literacy in K-12 students, says that although the science topics covered by the OERB “seem incomplete” – notably, the materials omit information on weather, climate and biology – they could still be fine for classroom use because “such curricula almost always focus on a limited subset of potential topics for each grade level.”
“If there’s legitimate science content that’s being provided by this group, it might not be as bad as it sounds at first blush,” he says, even if some teachers do insert their opinions into their lessons.
That’s because children may not be as susceptible to their teachers’ opinions as one may think, Peterson says. His research suggests that when students are taught both the processes and effects of climate science, they often independently conclude that humans are the primary cause.
In states where oil is such a key player in the state’s economy, such as Oklahoma, discussions about climate change can be dicy. Just 46 percent of adult Oklahomans believe climate change is caused mostly by human activities, below the national average of 53 percent, according to the Yale Program on Climate Change Communication.
The oil and gas industry accounts for about 13 percent of household earnings in the state. About 43,000 Oklahomans have jobs directly related to the sector, said McNutt, the governor’s communications director, via email. By the end of 2016, as the industry began to slowly recover from the energy slump, the unemployment rate in Oklahoma has been equal to or lower than the national average.
‘The Only Time the Budget Works Is During an Oil Boom’
While the lower tax rates for some oil and gas wells may prompt industry leaders to invest more in Oklahoma’s drilling sector, they are also among the chief causes of the state’s financial woes. Because Oklahoma relies heavily on tax revenue from oil and gas production to prop up its budget, the tax breaks, which were originally designed as a temporary measure, along with a period of downturn in the energy sector have devastated Oklahoma’s public spending and left state leadership to confront a mounting budget crisis.
In 2014, with the oil and gas tax incentive program set to expire the following year, lawmakers made the lower tax rate permanent, agreeing on a gross production tax rate of 2 percent on all new wells’ first three years in production. After that, production is taxed at the state’s historical rate of 7 percent, despite horizontal wells yielding significantly less oil and gas – and therefore tax revenue – after the first three years.
“[Most new Oklahoma wells] are the horizontal wells that produce a lot at first and then dramatically drop down to almost to a trickle,” says Senate Democratic Leader John Sparks. “So the best years of that production will end here in two or three years.”
The tax breaks were first introduced in 1994 to incentivize horizontal drilling, a new and risky endeavor at the time, but as an increasing share of Oklahoma’s oil production came from horizontal wells, the state struggled to bring in enough revenue to balance its budget.
Oil prices and output remained high between 2008 and 2014, but tax revenue from the industry dropped by about 40 percent partly because of plummeting natural gas prices and the normalization of horizontal wells. During that time frame, Oklahoma missed out on about $800 million in potential revenue because of the tax breaks, Reuters reported in May.
For years, the state has relied on one-time fixes to prop up the budget, according to the report from Oklahoma State Treasurer Ken Miller, a strategy that has exacerbated Oklahoma’s current financial deficits. One of those non-recurring measures is a modest tax increase this year on some horizontal wells that had been exempt from the 2014 mandate, which Sparks says won’t help fill Oklahoma’s budget hole in the long term.
“That increase is really a temporary financial boost, because those wells are going to go from producing a bunch of oil every day to just a barrel or two within two to three years,” Sparks says. The increase is expected to generate about $138 million in the 2018 fiscal year.
Now, Oklahoma’s leadership is at an impasse. Republicans rejected a package of broad tax increases on cigarettes, fuel, income and gross production taxes during the spring legislative session, and Sparks says the negotiations then deteriorated into “political horse-trading.”
Ending the oil and gas tax incentives would hurt the state’s small drillers, Republican leadership argues. And industry leaders say oil and gas companies already pay their fair share of taxes, contributing more to the state budget than most industries.
“We want people to drill. That’s where we get all of our money,” Sen. Kim David, chair of the Senate Appropriations Committee, told local news outlet KFOR-TV during budget negotiations. She added that raising the tax from 2 to 7 percent “would get us nothing at this time except some of our small drillers that want to drill here would not drill here.” David and several other Republican state leaders did not respond to interview requests.
Other oil-dependent states tax the industry much more heavily. With the blended tax rates, Oklahoma drillers paid an effective tax rate of 3.2 percent in 2016, significantly lower than in North Dakota (9.4 percent) and Wyoming (13.4 percent), a report by the Covenant Consulting Group for the Idaho Department of Lands found. In 2012, Oklahoma’s oil drillers paid an effective rate of 6.38 percent and natural gas producers paid 6.08 percent, according to the report from Miller, the state treasurer.
Raising the tax rate to 7 percent on all new production beginning in September 2017 would have meant an additional $247.6 million in revenue through the remainder of the 2018 fiscal year, which began in July, according to an analysis from the Oklahoma Policy Institute.
That is a significant share of the $878 million budget deficit for 2018 that was caused in part by generous tax breaks for oil companies. And it’s more than the $215 million lost in expected revenue from a cigarette fee quashed by the Supreme Court this month. The high court ruled that the fee was as a revenue-raising measure passed in violation of Oklahoma’s legislative process.
In response to the ruling, Gov. Mary Fallin called for a special legislative session to force lawmakers to bridge the state’s budget deficit and prevent major cuts to three state health agencies.
“These agencies and the people they serve cannot sustain the kind of cuts that will occur if we do not find a solution,” Fallin, a Republican, said in a statement. Discussions are underway with state leadership on potential revenue-raising measures and budget cuts, McNutt said via email.
But Sparks says some lawmakers are content to postpone any decisions until February, when the next legislative session begins. Until then, he says some state health programs, including those that deal with mental health and foster care services, will be placed on hold.
“The way things are going, the only time the Republicans’ budget works is during an oil boom,” Sparks says. “If you can only function financially during an economic boom, that’s not very good management.”
‘Nobody Wants to Run Oil and Gas Out of the State’
As Republicans and Democrats debate over taxes and funding for education and other public services, oil and gas has been the third party at the table.
“For too long politicians have been more concerned with the next election rather than the next generation,” Miller, the state treasurer, wrote in his report. “Our people and businesses need a tax system that retains the profit incentive to propel the economy and incomes, but they also require one that properly educates, protects and transports a healthy populace and workforce.”
During closed-door negotiations this spring between Fallin and leaders from both parties on the proposed production tax increases, the governor consulted Larry Nichols, co-founder of industry giant Devon Energy, about tax rates for the oil and gas industry. McNutt said Fallin asked Nichols to verify statements from Democrats on the proposed tax increase during an unrelated phone conversation.
“The governor was prepared to be completely deferential,” Sparks says. “She didn’t call up any teachers to see how much they needed to keep the schools open five days a week. She didn’t call any of the schools to see how much money they needed to do that, and so that was more than a little frustrating.”
Leaders in several states, including Oklahoma, have been criticized for their close ties with oil and gas firms such as Devon Energy. Perhaps most notable is former Oklahoma Attorney General Scott Pruitt, who held a key role in a “secretive alliance” of energy businesses and attorneys general, a 2014 investigation by the New York Times revealed. (Pruitt now heads the U.S. Environmental Protection Agency, charged with protecting the nation’s air, water and land.)
As the oil and gas drilling industry continues to rebound from its most recent downturn, Oklahoma lawmakers may breathe a sigh of relief. At the end of July, the state had 134 active oil or gas rigs, compared with 58 at the end of July 2016. And the sector will likely see strong growth in the next three to six months, according to another Office of the State Treasurer report.
Still, unless Oklahoma’s legislators can find a way to diversify the state’s revenue sources and balance the budget, the fate of public services such as health care and education will remain beholden to the fortune of the oil and gas industry.
“Nobody wants to run Oklahoma’s oil and gas industries off,” Sparks says. “Nobody wants them to pull up and head to Houston. But there’s probably a better balance we can strike.”