(Oklahoma City, April 28, 2009): Oklahoma Policy Institute released a new fact sheet on Oklahoma’s gross production tax that takes a specific look at the tax exemptions that are offered for different forms of oil and gas production. Over the past five years, producers have claimed $339 million in exemptions, or rebates, from the gross production tax, with almost three-quarters of the rebates claimed for deep well drilling and horizontally drilled wells. Most gross production tax exemptions are set to expire on June 30, 2009; the Legislature is considering bills (HB 2026 and SB 313) that would extend the exemptions through 2012.
“As the state begins to wrestle with what looks to be enormous and prolonged budget shortfalls, this seems to be the right time for policymakers to carefully review the tax breaks being offered to oil and gas producers and to consider whether there should be some appropriate caps placed on the amount of tax rebates that can be claimed,” said David Blatt, OK Policy’s Director of Policy.
The state currently caps the rebates that can be claimed for deep wells drilled below 15,000 feet at $25 million per year. Most other exemptions are uncapped but can be claimed only when the average annual index price of natural gas is below $5.00 per MCF or the price of oil is below $50 per barrel. Exemptions for horizontally drilled wells are subject to neither a cap nor a price trigger; the state paid out over $35 million in rebates for horizontal drilling in FY ’08.
“Applying the cap that is currently in place for deep well drilling to other exempted production, or creating an overall cap on gross production tax rebates would create greater budget certainty over the coming years,” said Blatt. “We know that schools, social services, public safety and other vital areas of the state budget are looking at deep cuts. In this environment, limiting the tax breaks offered to producers seems a reasonable way to minimize the impact of cuts to core services and ensure that sacrifices are shared.”
A recent study by Oklahoma City University business professor Steve Agee found that state tax incentives ranked last among ten variables cited by Oklahoma oil industry executives as affecting their decision to drill. Less than half of the respondents said that the availability of a gross production tax incentive rebate was an influential part of their decision of whether to drill or not to drill a well.
According to OK Policy’s fact sheet, Oklahoma accounts for 8.8 percent of total U.S. natural gas production and 3.2 percent of crude oil production, ranking 3rd and 5th among the 50 states respectively. The state collected $1.168 billion from gross production taxes in FY ’08, of which $808.2 million, or 69.2 percent, was from the gross production tax on natural gas, and $360.2 million, or 30.8 percent was from the gross production tax on oil. Gross production taxes represented 14 percent of total states taxes in FY ’08, ranking behind only the personal income tax and the sales tax as a top source of state tax revenues.
For more information, you can find the full fact sheet here.