By Jerry Wofford, Tulsa World
A high-ranking state official says tax breaks for oil and gas drilling held back more robust growth of the state’s general revenue fund in the last fiscal year, adding that legislators should examine the effect those breaks have on the state.
Industry leaders say the tax incentives have provided a big push for Oklahoma’s oil boom in recent years, with the tax breaks for horizontal drilling bringing more producers to the state’s oil fields. The boom in oil production has helped with income and sales tax revenue and spread through the state economy, they contend.
Not everyone in the industry supports such incentives. George Kaiser, head of Tulsa-based Kaiser-Francis Oil Co., said in an email to the Tulsa World that gross production tax incentives don’t provide a strong draw for energy producers.
“There are more important things that Oklahoma can do to assure the continued vibrancy of the oil and gas industry in the state and the employment it provides. Surveys of producers have revealed that gross production tax exemptions play almost no role in stimulating drilling and most of the value goes to out-of-state shareholders,” Kaiser said.
The tax credits, rebates and refunds for oil and natural gas drilling totaled $321 million in the last fiscal year, according to preliminary data from the state Office of Management and Enterprise Services.
Rebates and refunds were $173 million of that total, with $102 million of that associated with horizontal wells. Tax credits for horizontal wells were $148 million in fiscal year 2013, which ended June 30.
A $248 million gain in income and sales tax revenue to the general revenue fund helped blunt a $208.9 million drop in oil and gas collections in fiscal year 2013 compared to the last fiscal year, according to Secretary of Finance and Revenue Preston Doerflinger.
Doerflinger said the drop in tax revenue is the effect of a 2010 law stipulating how horizontal and deep wells are taxed.
The law dropped the gross production tax rate on horizontal wells from 7 percent to 1 percent for 48 months after the start of production. Even then, the 1 percent goes to counties and school programs, not the state’s general revenue fund. After 48 months, the well goes back to 7 percent.
“The boom in the energy industry is improving Oklahoma’s economy in so many ways, but the general revenue fund isn’t seeing the benefits it would have before 2010,” Doerflinger said in a press release Wednesday. “The 2010 law has led to some real revenue loss. In our estimation, policymakers should consider revisiting this law in consultation with the energy industry to determine whether it is fair and equitable to the industry, the state and all its taxpayers.”
Mike Terry, president of the Oklahoma Independent Petroleum Association, said the tax incentives for horizontal drilling should be considered a capital investment in the state’s energy industry.
“Tax provisions for the oil and natural gas industry have helped attract new companies exploring for crude oil and natural gas to our state, strengthening our energy industry and increasing the amount of good jobs and tax dollars generated for the state,” Terry said. “It’s easy to defend because it works, and I think it’s smart on the state’s part.”
Incentives for horizontal drilling began in 1990 and deep wells in 1995. Both had a incentive period of 28 months, where the company paid 7 percent and then requested a 6 percent rebate or refund on qualifying wells.
In 2003, the period was extended to 48 months for horizontal and 60 months for ultra-deep wells until well payback was achieved.
Lawmakers in 2010 ended the rebate portion of the tax incentives and instituted a cut for 48 months to 1 percent, with 7 percent paid thereafter.
Terry said the changes came during the recession when the state was looking to increase drilling activity, thereby increasing revenue in the state.
“The industry came up with the idea that if you invest with us, drilling wells – particularly in horizontal wells – that we think that activity will increase,” Terry said. “It’s worked exactly as planned. We’ve seen a tremendous increase in horizontal drilling activity.”
Horizontal drilling has become nearly standard for new wells, not just in Oklahoma but across much of the nation. The release from Doerflinger’s office cited the latest Baker Hughes Inc. rig count that showed 174 rigs were engaged in exploration or development in the state, with 161 of those involved in horizontal drilling.
“Any fiscally responsible policymaker needs to seriously consider at what level government should incentivize something that is now standard practice,” Doerflinger said. “It’s not responsible for government to give money away as an incentive if no incentive is needed.”
David Blatt, director of the Oklahoma Policy Institute, said the group appreciates Doerflinger’s candid remarks about gross production tax policy.
Blatt said that at a time when education funding is being cut and other state services are stretched thin, Oklahoma should carefully consider its revenue.
“This is costing the state hundreds of millions of dollars that is squeezing the revenue that is available for strengthening our schools and ensuring public safety and providing health care and other vital services that have been badly underfunded in Oklahoma,” Blatt said. “Even without the subsidies, Oklahoma’s tax rate is very competitive. We can do away with these subsidies; it would let the free market play itself out.”
Drilling tax breaks, fiscal year 2013
$321 million: Total of rebates, refunds and tax credits associated with oil and gas drilling
$173 million: Total of rebates and refunds for horizontal and ultra-deep wells
$148 million: Total of tax credits for horizontal wells
$79 million: Amount for horizontal oil wells
$69 million: Amount for horizontal gas wells
Source: Oklahoma Office of Management and Enterprise Services