Oklahoma House Speaker Wants to Make Horizontal Drilling Tax Break Permanent (StateImpact)

By Joe Wertz

Oklahoma House Speaker T.W. Shannon will author legislation to make permanent an oil and gas industry tax break for horizontal drilling.

The incentive lowers gross production taxes from 7 percent to 1 percent for the first 48 months of production, and was installed in the ’90s to encourage the then-experimental type of drilling. Now days, most oil and gas wells in Oklahoma are horizontally drilled, and critics say the incentives are unnecessary.

But Shannon and oil and gas operators — like Triad Energy’s Mike McDonald, who StateImpact interviewed about the incentives in August 2013 — say lower taxes have encouraged drilling and helped create jobs.

“…we should make this rate permanent and send the message that Oklahoma is a place that welcomes the oil and gas industry, along with the jobs and economic development they bring to our great state,” Shannon said in a statement about the legislation he plans to introduce in the 2014 legislative session that begins in February.

Allowing the gross production tax rate on horizontal drilling to return to 7 percent, would have a “severe impact” on Oklahoma’s economy and job market, Shannon said in his statement.

Republican Secretary of Finance and Revenue Preston Doerflinger created a small fuss in July 2013 when he asked lawmakers to re-examine oil industry tax breaks, which he said totaled $321 million in fiscal year 2013.

“Any fiscally responsible policymaker needs to seriously consider at what level government should incentivize something that is now standard practice,” Doerflinger wrote. “It’s not responsible for government to give money away as an incentive if no incentive is needed.”

One complicating factor: Right now, the state is currently paying double. The Tulsa World‘s Randy Krehbiel explains:

During the depths of the recession, producers agreed to forgo collecting rebates from the program. That helped Oklahoma in the short run, but now the state is paying for current production as well as the credits earned during the moratorium.

The left-leaning Oklahoma Policy Institute has been a vocal opponent of the horizontal drilling tax break. In August, the institute’s David Blatt told StateImpact: “A tax subsidy that might have been tenable when it was costing the state $20 million a year becomes a lot less tenable when it it’s costing the state $150 million a year.”

Blatt echoed those sentiments to the World:

David Blatt of the Oklahoma Policy Institute, a consistent critic of the program, said it will cost the state $252 million this year without having much effect on exploration or production.

“Companies drill where the gas is,” Blatt said. “These wells would be highly profitable even without the exemption.”

Oklahoma House Speaker Wants to Make Horizontal Drilling Tax Break Permanent

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