As the budget debate has intensified in recent weeks, legislators and advocates have heard dramatically different estimates of how much additional revenue could be raised by ending or reducing the special tax rate for oil and gas production. Some have claimed that ending the gross production tax break would only bring in an additional $20 million next year, while others have suggested the impact could be as high as $350 million.

A new memo prepared for OK Policy by two leading tax experts, Jerry Johnson and Michael Clingman, provides clarity to this issue. The memo explains why honest revenue estimates vary so greatly and presents solid numbers on how much additional revenue would be generated if GPT is increased to 5 percent or 7 percent on new wells. It finds that if the Legislature is willing to apply the higher rate to wells drilled prior to the law being passed, which is well within its legal authority, the state would generate from $150 million to $313 million more for next year’s budget.

Here’s a summary:

1. Why the different estimates?

The Legislature is faced with several different choices for how to increase the gross production tax. These relate to:

a. The tax rate. Currently, new wells are taxed at 2 percent for the first 36 months of production and 7 percent thereafter. Some favor taxing production at 7 percent from the very start, while others have suggested an initial 5 percent rate. There are other options as well, including limiting the 2 percent rate to the first six or twelve months of production before going to 7 percent, or taxing all production at 5 percent

b. Whether the new rate will apply to all wells or only to wells drilled after the effective date of the legislation. These two alternatives result in drastic differences in how much revenue will be generated. As the memo notes, “the state has broad authority to adjust tax rates. The gross production tax is a tax on production and the incidence of the tax occurs when the oil or gas is actually produced. It is appropriate to adjust the rate for future production.”

c. How the additional revenue will be apportioned. Currently, only a portion of gross production taxes are allocated to the General Revenue (GR) fund. If the gross production tax rate is raised, the additional revenue could all be apportioned to GR, or the current apportionment methodology could be maintained.

2. How much additional revenue will be raised by increasing the gross production tax?

We present several different scenarios, depending on whether the rate is raised to 5 percent or 7 percent , whether the new rate is applied to all production or just to new production, and whether the new revenue is directed only to the General Revenue Fund or is allocated based on current apportionment shares. Note that all three scenarios assume a September 1st effective date to conform with the constitutional stipulation that tax increases cannot go into effect until 90 days after they are signed by the Governor, and all limit appropriations to 95% of General Revenue collections. The revenue estimates are based on the price and production forecasts used by the Board of Equalization as part of the February 2018 revenue certification.

A) Applying the rate increase to all production after September 1, 2017 and amending the current apportionment percentages to direct all new revenues to the General Revenue Fund-

  • 7% – $312.9 million
  • 5% – $197.9 million

B) Applying the rate increase to all production after September 1, 2017 and keeping the current apportionment percentages-

  • 7% – $247.6 million
  • 5% – $151,6 million

C) Applying the rate increase only to wells drilled after September 1, 2017 and keeping the same apportionment percentages-

  • 7% – $21.3 million
  • 5% – $12.8 million

What Should We Do?

The Blueprint for a Better Budget developed by the Save Our State Coalition, of which OK Policy is a part, recommends Option A with a tax rate of 7 percent on all production to raise $312.9 million in FY 2018. The new rate would only apply for 8 months of FY 2018; the fully annualized revenue impact would be $469 million.

Even with the proposed increase, Oklahoma’s effective tax rate on oil and gas production would remain among the lowest in the nation. Oklahoma will continue to be an attractive location to drill due to our ample reserves, existing levels of production, skilled workforce, and established infrastructure, while we would be better able to make the critical investments in our workforce, infrastructure and health that energy companies, all businesses, and all communities depend on . Our advocacy alert provides additional information and resources making the case for ending gross production tax breaks.

Click here to see the full memo from Jerry Johnson and Mike Clingman, which also provides a detailed explanation of the certification process for revenue changes approved by the Legislature. You can see the revenue impacts of a full range of possible tax rates here.