Oklahoma continues to give up well over $400 million per year in tax breaks to oil and gas producers, even as oil prices fall and the industry sheds thousands of jobs, according to data compiled from the Oklahoma Tax Commission.
Last year (FY 2015), the state lost $473.0 million in revenue from taxing horizontal production at 1 percent and deep wells at 4 percent rather than the standard tax rate of 7 percent, based on OTC data. Over half of all production (54 percent) was taxed at 1 percent. The state collected just $542 million in gross production taxes off of total production valued at $14.5 billion, an effective tax rate of 3.7 percent.
In addition to the $473.0 million in tax breaks for current production, the state paid out $18.1 million in rebates for other forms of production eligible for subsidies and $118.6 million in deferred rebates that were accrued during the last budget downturn and paid out from FY 2013 to FY 2015. This brings the total cost of tax breaks to $609.8 million in FY 2015, up by $157 million from 2014, even as oil prices fell over the course of the year (see chart below).
This year (FY 2016), the state is expected to provide $390.5 million in tax breaks in the form of a lower tax rate on current production, based on estimates the OTC provided as part of the December certification. Under legislation passed in 2014, almost all new wells are taxed at 2 percent for the first 36 months of production before reverting to the standard 7 percent rate. In addition, horizontal wells and deep wells drilled prior to July 1, 2015 are taxed at 1 percent and 4 percent respectively for 48 months.
The cumulative cost of these tax breaks have reduced revenue from oil and gas drilling by more than half. The total cost of tax breaks for oil and gas production, $390.5 million, is expected to slightly exceed total gross collections ($379.8 million). In addition, the state expects to pay out $36 million in rebates in FY 2016 for prior year production, bringing the total cost of tax breaks to $426.7 million.
In FY 2017, the cost of tax breaks on current production due to the lower tax rates on new wells is expected to decline slightly to $326.5 million. But the state is projected to pay out $158.4 million in rebates on prior year production. This is due mostly to a tax break passed in 2005 that rebates 6/7ths of the tax on economically at-risk wells, defined as an oil or gas lease operated a a net loss or that has a net profit less than the gross production tax paid. In total, tax breaks are expected to total $484.9 million in FY 2017, far outpacing total gross collections of $372.7 million.
Under legislation introduced this week authored by Senate President Brian Bingman and House Speaker Jeff Hickman, the rebate for economically at-risk wells would be terminated retroactive to December 31, 2014. Producers would have until the end of 2016 to claim rebates on production that qualified for the rebate prior to its termination. If passed into law, the bill, SB 1577 is expected to boost FY 2017 revenues by $133 million.
While eliminating the rebate for economically at-risk wells will help close the current budget gap in a time of low oil and gas prices, the state continues to lose hundreds of million annually by taxing new production at just 2 percent. If and when energy prices recover, this extremely low rate will suppress much of the rebound in state revenues. To put Oklahoma back on solid financial footing, lawmakers should restore the tax rate on all production to at least 4 or 5 percent when energy prices are low and to 7 percent when prices are above a set floor.