One certainty about the 2017 legislative session is that tax breaks for the wind industry are going to be a prime target for lawmakers looking for ways to address the state’s short-term budget gap and long-term structural budget deficit. Close to 20 bills have been filed that would limit or eliminate subsidies for wind producers, and Governor Fallin in her FY 2018 Executive Budget called for wind production to be taxed.
While it is true that subsidies for the wind industry have been rising, the reality is that they pale in comparison to those the state provides to oil and gas producers. Oklahoma’s standard tax rate of 7 percent on oil and gas production has been in effect since the 1970s, but over the years, various exemptions were put in place to subsidize different kinds of production. Now, under legislation passed in 2014, almost all new wells are taxed at just 2 percent for the first 36 months of production before reverting to the standard 7 percent rate. In addition, horizontal wells and deep wells drilled prior to July 1, 2015 are taxed at 1 percent and 4 percent respectively for 48 months. As more production is taxed at lower rates, the effective tax rate on all gross production in the state has plummeted from over 6 percent in FY 2012 to under 3.5 percent in FY 2015, according to data from the Oklahoma Tax Commission.
As a result of these tax breaks, the state is projected to bring in $460 million less this year (FY 2017) than if all production was taxed at 7 percent, based on estimates the Oklahoma Tax Commission provided as part of the December 2016 certification. This total includes about $20 million in rebates for certain production that is taxed initially at 7 percent but then qualifies for a lower rate. In FY 2018, the cost of oil and gas tax breaks is expected to increase by an additional $50 million, topping $510 million. The FY 2018 estimates assume that oil and gas production will remain at the same level as in FY 2017 but that the price of both oil and gas will rise.
The estimates of the cost of subsidies for wind producers vary, but we do know they are substantially less than the $400 million to $600 million cost of subsidies for oil and gas. According to the Oklahoma Tax Commission’s 2015-16 tax expenditure report, the zero emission tax credit, which provides $0.005 per kWh generated, cost $59.7 million in FY 2016. The Incentive Evaluation Commission, which recently issued a detailed report on the tax credit for zero emission facilities, stated that credits totaling $50.6 million were claimed in 2015 and that the future cost could rise to $100 million annually by the time the credit is phased out in 2020. (Since wind credits can be carried forward for up to ten years, the state will have continued liability even once the credit has been sunsetted. In the Governor’s FY 2018 budget, it is estimated that producers will be able to claim an average of $60 million a year in credits through 2032 if the credit expires in 2020).
The Windfall Coalition, a group of oil and gas producers and property owners that opposes wind subsidies, calculates the cost of the zero emission credit at $64 million in FY 2016 and $123 million in FY 2017. In addition to the zero emission credit, wind power producers have also benefited from the five-year ad valorem manufacturing exemption; in FY 2016, the state made $29.6 million in payments to wind producers for this exemption, according to the Oklahoma Tax Commission.
The Legislature has already acted to curb wind subsidies. As a result of legislation passed in 2015, wind producers are no longer able to claim the ad valorem exemption for facilities developed after 2016. Last fall, the Incentive Evaluation Commission recommended either capping the total amount of the zero emission tax credit or accelerating the credit’s expiration to the end of 2017 from the end of 2020. There’s a strong likelihood that the Legislature will pursue one of these approaches this session.
These actions to rein in wind tax breaks have some good justifications. As the wind industry has expanded and solidified in Oklahoma, subsidies have become more expensive and less necessary. But subsidies to the wind industry are not a significant cause of the state’s recurring budget shortfalls. If we are serious about putting our budget on solid footing and ensuring that the state can meet its basic obligations, then the hundreds of millions of dollars we are providing in subsidies for oil and gas producers must be part of the discussion.