OKPOLICY.ORG
(Tulsa, OK): Tax breaks for the oil and gas industry are growing out of control and squeezing out resources for schools, roads, public safety, and other keys to long-term economic growth, according to a new report issued today by the Oklahoma Policy Institute.
“Policymakers created the tax breaks to encourage what were once novel, expensive, and risky methods of drilling,” said David Blatt, OK Policy’s Director and the report’s author. “Today, these techniques are standard practice, making the subsidies unnecessary.”
The industry accrued $645 million in tax rebates and credits from the state over the latest 3-year period (FY 2010 – FY 2012). Most of the credits – $537 million – went to producers of horizontal wells. As production from horizontally-drilled wells skyrockets, the cost of these credits will continue to grow exponentially in coming years, and could reach $400 million or more annually without legislative action.
“In a time of scare resources, it’s not right for Oklahoma to make unnecessary tax breaks to oil and gas companies a higher priority than support for schools, health care, and infrastructure,” said Blatt.
OK Policy recommends that the Legislature allow all gross production tax preferences to expire on or before their sunset date. Currently, the exemptions for horizontal and deep well drilling are due to expire July 1, 2015, while the other exemptions have a sunset date of July 1, 2014
The report shows that gross production tax breaks are not necessary to encourage oil and gas production. In particular, it finds that:
- State oil and gas tax preferences do not significantly influence the decision to drill. In a survey of Oklahoma oil and gas companies, state tax incentives were ranked as the least important factor affecting drilling decisions, ranking well below estimates of reserves, drilling cost and the commodity price;
- Oil and gas tax preferences are rarely decisive for the profitability of drilling. Even though drilling costs are high, horizontal and deep wells have considerably higher production rates and greater reserves than do vertical wells;
- Companies are unlikely to shift production elsewhere based on tax rates and preferences. Oklahoma will remain an attractive location to drill due to our ample reserves, existing levels of production, skilled workforce, and established infrastructure, with or without tax subsidies.
If lawmakers decide to continue the exemptions or keep them as interim measures until an eventual expiration, they should also adopt the following reforms:
- Provide all drilling subsidies only when prices fall below a reasonable price floor;
- Put an annual cap on gross production tax breaks;
- Tax horizontal drilling at the same rate as deep well drilling.
“If we curtail tax breaks for horizontal and deep well drilling, energy producers will continue to operate profitably, and we can better support the services that enable our families, communities and businesses to prosper,” Blatt said.
For the full-length issue brief and one-page summary, go to: https://okpolicy.org/unnecessary-and-unaffordable
