Increased gross production taxes are fueling state’s revenue boom

Oklahoma is currently enjoying a period of exceptionally strong revenue growth. As we near the end of FY 2019, General Revenue collections have already come in $360 million ahead of the year’s estimate, which will ensure a large end-of-year deposit to the Rainy Day Fund. Next year’s revenues collections are projected to be more than 20 percent higher than last year’s, which has allowed the Legislature to approve two straight years of substantial funding increases.

Much of the credit for the prosperous fiscal situation is due to rising oil and gas revenues. In recent sessions the Legislature curbed tax breaks for the oil and gas industry that had allowed a growing share of production to be taxed far below the standard 7 percent rate. Until 2017, some older wells were taxed at just 1 percent during their first three years of production while new wells were taxed at just 2 percent for three years. In 2017, the Legislature restored the rate for all existing wells to 7 percent and then in 2018 restored the rate on new wells to 5 percent for the first 36 months.

Some in the oil and gas industry warned lawmakers that higher tax rates would stifle production and harm the energy industry and overall state economy. This has not appeared to be the case. As can be seen from the graph below, oil and gas production is currently at all-time highs in Oklahoma as well as nationally.  Over the 12-month period through February 2019, Oklahoma oil production averaged 17 million barrels, which is 30 percent higher than during the peak years of the early 1980s.

Gross production collections are skyrocketing

The restored tax rates and growth in production have given state revenues a significant boost. Through April, gross production tax revenues to the General Revenue Fund are at $583.9 million, which is 132 percent above last year (FY 2018) and $200 million, or 52 percent, above the certified estimate.

Overall, General Revenue collections are $360 million above the estimate through the first ten months of FY 2019. Gross production taxes account for over half of this surplus, as the graph shows.

The increase in the initial tax rate on gross production from 2 to 5 percent approved by the Legislature last year accounts for a substantial share of this year’s increase in gross production tax revenues. The higher rate, which took effect in September, accounted for $260 million in increased GPT revenue through April, according to data from the State Treasurer’s Office. This is already $90 million (53 percent) in excess of what the higher GPT rate was expected to generate for all of FY 2019, with two more months of collections still to come. Overall, total GPT collections are 38 percent higher this year than they would have been had lawmakers not boosted the rate from 2 to 5 percent. We do not have data to determine the impact of restoring the 7 percent rate on older wells on revenue collections, but it is likely substantial.

“Overall, Gross Production Tax collections are 38 percent higher this year than they would have been had lawmakers not boosted the rate from 2 to 5 percent.”

Thanks to surging gross production tax collections, along with income tax revenues, which are $199 million, or 10 percent, above the estimate, the state will likely see a General Revenue Fund surplus of well over $400 million at the end of FY 2019. This surplus is automatically deposited to the Rainy Day Fund. The deposit will bring the Fund’s balance, which is currently $453 million, close to its current constitutional cap of roughly $890 million.

Strong gross production revenues are fueling budget growth

The FY 2020 budget approved by the Legislature appropriated $7.999 billion across state government, $434 million (5.7 percent) above the original budget for FY ’19. In addition, lawmakers set aside $187 million in available certified revenue for the Revenue Stabilization Fund (the Fund also received $13 million from a revolving fund).

Of the roughly $600 million in growth revenue for the FY 2020 budget, at least one-third is due to increased gross production tax collections. Gross production tax collections available to appropriate in FY 2020 are $740 million, which is $213 million more than gross production taxes that were available for the FY 2019 budget (see note 1 below).

Oil and gas taxes are an especially volatile revenue source, and there is good reason to be concerned about the state’s vulnerability to future drops in collections. However, the state has created a safeguard in the Revenue Stabilization Fund, which received a $200 million deposit this year and will likely grow by at least $200 million more in FY 2021.

The bottom line

Strong oil and gas tax collections, due in substantial part to lawmakers’ willingness in 2017 and 2018 to restore the gross production tax to higher rates, are a major contributor to the state’s fiscal health. They are resulting in a large anticipated deposit to the Rainy Day Fund as well as significant funding increases and increased savings as part of the FY 2020 budget.

(1): Based on FY 2020 February certification, schedule 7, comparing 95 percent of proposed FY-2020 estimate (column 7) to 95 percent of FY-2019 Estimate (column 3).

ABOUT THE AUTHOR

Former Executive Director David Blatt joined OK Policy in 2008 and served as its Executive Director from 2010 to 2019. He previously served as Director of Public Policy for Community Action Project of Tulsa County and as a budget analyst for the Oklahoma State Senate. He has a Ph.D. in political science from Cornell University and a B.A. from the University of Alberta. David has been selected as Political Scientist of the Year by the Oklahoma Political Science Association, Local Social Justice Champion by the Dan Allen Center for Social Justice, and Public Citizen of the Year by the National Association of Social Workers.

7 thoughts on “Increased gross production taxes are fueling state’s revenue boom

  1. David, your article gives appropriate credit to lawmakers for having the courage to raise revenue. It does not however, give credit to Governor Mary Fallin, who advanced this budget agenda, negotiated agreements with both parties and signed these revenue measures into law. Without her leadership, the state would still be trying to cut its way to prosperity.

    1. That’s a fair point, Deby. Governor Fallin changing course on tax policy during her final three years in office (remember that she pushed for income tax cuts until 2014 and for continued low rates on new wells) was of tremendous help in the turnaround we are now seeing.

  2. Both of you are failing to remember it was the republican legislature that flat out refused to raise GPT until the teachers strike that brought education to its knees. Both democrats and teachers brought up increasing the GPT but was always rejected by the legislature. It took a work stoppage by teacher to get the attention of the legislature who still tried to stop and increases. The republicans even brought in oil rigging trucks in protest of raising the tax. So Fallin and the republican controlled legislature finally had to cave in to the demand of the strike. Not only did this move save the state from further bankruptcy but it also demonstrates the power of the Unions and the right of collective bargaining. When the people become one voice the people can affect change. Give the credit where the credit is due, not to a “cut funding at all cost” republican legislature and mentality. Citizens elected these people to pass laws for the greater good, not to profit for themselves, their party and their wealthy power buddies.

  3. So I have a question I just stayed in Enid. Where they are saying oil production has dried up due to the tax inease.. I am wondering if that is really the case

    1. That seems like an unlikely explanation. Most studies have found that the state gross production rate is a very insignificant factor guiding production decisions, which are mostly tied to changes in price, supply and reserves.

      1. I would disagree. The rig count in Oklahoma has dropped 87 rigs in the past year, while those same rigs have increased in states like Texas and New Mexico. Are company decisions on where to drill not based on profits? If the tax rate increased 3% those same companies return on investment has just decreased 3%. I do not think it’s a coincidence that within 18 months of HB1010X that drilling rigs and production have decreased so substantially.

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