Many Americans have reason to celebrate when gas prices drop. In states that aren’t as dependent on the oil and gas industry for jobs and tax revenues, low prices can help the finances of regular families and boost the economy as a whole. Those benefits also come to energy-dominated states like Oklahoma, but the downside is much greater.
The energy industry’s tendency to go through cycles of boom and bust has put Oklahoma’s state revenues on a roller coaster. This volatility can make it very difficult to keep Oklahoma’s state budget in balance, and it means state revenues plummet just when Oklahoma can least afford the loss. Gross production taxes from oil and gas drilling have dropped to a twelve year low, and the impact is also being felt in suppressed income and sales tax collections as energy industry cutbacks reverberate through the economy.
Oklahoma’s Rainy Day Fund was created as one way to ease this volatility, and state officials have made various proposals to create other funds or increase what can be deposited in the Rainy Day Fund to stabilize the budget. Another idea worth considering is to adopt a temporary gas tax increase that only stays in effect as long as gas prices are low.
We’ve written before about how Oklahoma’s gas tax is highly outdated. Because it’s set at a flat 17 cents per gallon and hasn’t been adjusted since 1987, the tax has lost nearly one half of its real value over the past three decades. When you include the 14 cents per gallon of diesel that also hasn’t been adjusted since 1987, that translates to more than $338 million per year in lost revenues.
For every cent that we increase the gas tax, Oklahoma stands to gain about $19 million per year in revenues. About $8 million per year would be gained for each cent increase in the tax on diesel. If we increased each of these taxes by just 5 cents per gallon, that would create $135 million in new revenues to help address the budget hole. Even then, Oklahoma’s gas taxes would remain below the national average of 24.7 cents per gallon, and the state’s overall gas prices would still be among the lowest in the nation.
Some might argue that increasing the price at the pump could hurt revenues by causing Oklahomans to reduce their driving. But the evidence from swings in gas prices much larger than 5 cents show that Oklahomans’ demand for gas is fairly inelastic — we get about as much revenues from the gas tax when gas prices are high as when they are low.
Over the past decade, fluctuation in gas prices has been about nine times greater than any resulting changes in revenue from this tax. Oklahomans are using about the same amount of gas year after year — while it’s likely that more miles are being driven due to population increases, better fuel efficiency of vehicles means that the number of gallons burned stays level.
Lawmakers have recognized that the current gas tax is far from sufficient to cover Oklahoma’s transportation infrastructure expenses. That’s why Oklahoma has diverted large and increasing amounts of income tax revenue to the ROADS Fund. This year lawmakers have discussed taking out bonds to pay for transportation projects during the budget shortfall instead of providing these hundreds of millions of dollars in off-the-top funding. That idea may have some merit — but it also digs Oklahoma deeper into a hole in future years by growing our debt and increasing our reliance on one-time funding.
Even if lawmakers do not have the appetite for a permanent increase to the gas tax, enacting a temporary increase in times of low prices would make a lot of sense. It would kick in only when the burden of gas prices to regular families is low and when the need for a state revenue boost is highest. It would help provide a natural counterbalance to the highly volatile gross production tax.
This is another example of how our legislators have options to address the budget shortfall without devastating cuts to services that Oklahoma families need. If the worst cuts happen, it won’t be because of the oil and gas downturn; it will be because lawmakers refused to adopt sensible options in a crisis.