OKPOLICY.ORG
Is a bill that adjusts the tax rates on production of oil and gas a “revenue bill” under the terms of the Oklahoma Constitution? This is the question for the Oklahoma Supreme Court to decide in a challenge filed by Oklahoma City Jerry Fent to HB 2562. Along with a similar challenge to a bill , SB 1246, that cuts the top income tax rate, the Court’s answer could have a dramatic effect on Oklahoma’s fiscal and political landscape.
HB 2562 was the outcome of one of most contentious political battles of the past year. Currently, Oklahoma assesses a standard 7 percent severance tax on oil and gas but offers lower tax rates as a way to support and incentivize various forms of production. The most generous tax break – a 1 percent rate on horizontal wells for the first 48 months of production – is set to expire at the end of June 2015. With an overwhelming share of drilling activity in Oklahoma and elsewhere having shifted to horizontal production in recent years, the question of whether to continue the tax break became one with significant budgetary and economic implications.
The final version of HB 2562 revises the tax treatment of oil and gas production in several ways. Effective July 1, 2015, most new production, whether vertical or horizontal, will be taxed at 2 percent for the first 36 months of production and at 7 percent thereafter. The bill thus does away with the differential treatment for vertical and horizontal wells, lowering the tax rate for traditional wells from 7 to 2 percent for the first 36 months while raising the rate for horizontal wells from 1 percent to 2 percent in years 0-3 and from 1 percent to 7 percent in year 4. Other types of production that currently benefit from favored tax treatment, including deep wells, three-dimensional seismic shoots, and new discovery wells, will likewise be taxed at 2 percent for three years and 7 percent thereafter. However, certain production, including inactive wells, production enhancement projects, enhanced recovery projects and economically at-risk oil or gas leases, will continue to be taxed at 1 percent or 0 percent until 2020 [click here for a summary comparison of changes in gross production tax rates under HB 2562].
Fent’s lawsuit contends that HB 2562 violates Article 5, Section 33 of the Oklahoma Constitution, which pertains to revenue bills. The original constitutional language, which dates to statehood, states:
A. All bills for raising revenue shall originate in the House of Representatives. The Senate may propose amendments to revenue bills.
B. No revenue bill shall be passed during the five last days of the session.
In 1992, Oklahoma voters passed SQ 640, which added two new subsections to Article 5, Section 33 requiring that “any revenue bill originating in the House of Representatives” must either receive 3/4 approval of both Chambers or be approved by a vote of the people, and
HB 2562 passed in the final days of session and did not receive 3/4 support from either legislative chamber. That much is clear and beyond dispute.
What is in dispute in this case, as with the lawsuit challenging the income tax cut bill, SB 1246, is whether the terms “revenue bill” and “bill for raising revenue” apply only to bills that increases taxes, or do they encompass all bills that are primarily related to levying taxes, even if they would decrease taxes? Petitioner Fent contends that the legal definition of “raising revenue” is “to assemble or collect, as money”, akin to the expression “to raise an army.” In an amicus brief in support of Fent, Steven Dow cites a 1907 Oklahoma Supreme Court ruling, Anderson v. Ritterbsuch, that stated:
It is clear to our mind that “increase of revenue” is not implied in the language to “raise revenue.” The transitive verb “to raise” in this connection means “to bring together; to collect; to levy; to get together for use or service, as to raise money.”
Dow’s brief points to robust and consistent case law from federal courts and from Alabama, whose constitution provided the model for Oklahoma’s in this regard, defining ‘revenue bills’ as referring to all laws primarily relating to taxes.
In the State’s response, the Attorney General contends that both jurisprudence and common understanding establish that the constitutional requirements for revenue bills apply only to bills that increase taxes or generate new tax revenues, pointing to a long history of legislation altering gross production rates that have not conformed to the requirements of Article 5, Section 33. In a supporting amicus brief, the Oklahoma Independent Petroleum Association (OIPA) focuses on the well-established principle that a revenue bill must have as its principal purpose the levying of a tax, and cites a long string of cases where Courts have ruled that bills like HB 2562 that provide tax incentives have as their primary purpose to encourage certain kinds of economic behavior, not to raise revenue.
Fent’s challenges to SB 1246 and HB 2562 have both been argued in front of a referee and should be decided this fall. Since both cases hinge on the definition of a “revenue bill”, it seems likely that the two laws will either be upheld or struck down together. However, the Court could uphold HB 2562 (gross production tax) while striking down SB 1246 (income tax cut) by adopting the OIPA’s argument that HB 2562’s primary purpose is not to raise revenue. Alternately, it could save the income tax cut by adopting a narrower definition of ‘revenue bill’, yet still strike down HB 2562 on the grounds that it does increase taxes on certain types of production. Should even one of these bills be overturned, we can be certain that it will trigger an immediate and intense debate on what happens next.
