The cost of tax breaks for the oil and gas industry will exceed $500 million this year, according to projections recently released by the Oklahoma Tax Commission. This is substantially more than the projections made a year ago, reflecting the growing shift of production to minimally-taxed horizontal wells. The tax break for horizontal production alone is now estimated at a whopping $379 million for FY 2015.
The Tax Commission presented forecasts of gross production tax revenues on oil and gas for FY 2015 and FY 2016 in mid-December. For FY 2015, the OTC projects the state will collect $590.5 million in gross production taxes based on an average oil price of $76.32 per barrel and an average natural gas price of $4.25 mcf. Of this total amount, $63.1 million will be collected at the 1 percent tax rate, which is the rate currently assessed on horizontal wells during the first years of production, and $5.6 million at the 4 percent rate assessed on deep wells.
If this production were taxed at the standard 7 percent rate, the state would collect an additional $379.0 million from horizontal wells and an additional $9.7 million from deep wells. Along with the tax break in the form of a lower rate, the state this year is looking to pay out $77.6 million in deferred rebates to horizontal and deep well production that occurred from 2010-2012, and $50.6 million in rebates for other forms of production that are taxed at less than 7 percent. All told, tax breaks for oil and gas production are expected to total $516.7 million in FY 2015.
The cost of the oil and gas tax breaks is some $130 million greater than what OTC projected back in February. At the time, the lower tax rate on horizontal production was expected to have a $238 million revenue impact, compared to the current estimate of $379 million. As the graph indicates, the revenue impact of the tax break for horizontal production will have more than doubled in just the past two years and increased almost five-fold since 2010.
The Tax Commission also provided estimates of gross production tax revenues for FY 2016, the first year that the new tax rates approved last year in HB 2562 will begin to apply for new production. Under the new law, most new production, including traditional vertical wells, will be taxed at 2 percent for the first 36 months and at 7 percent thereafter. At the same time, some earlier production will continue to be taxed at the 1 percent and 4 percent rates. Based on the OTC’s current price and production forecasts, we calculate the total cost of the lower tax rates to be $308 million in FY 2016. Since new horizontal, deep well, and traditional production are no longer differentiated, there is no way to calculate how this amount compares to what the tax breaks would have cost under the law prior to HB 2562.
These tax breaks have been a big part of why Oklahoma has faced repeated budget shortfalls even while the economy recovers. If it weren’t for revenue lost to the tax break for horizontal drilling, Oklahoma could have restored all of the cuts to education since 2008 and still have more than $200 million left to spare — enough to avoid painful cuts to Medicaid and community health centers, fully fund court-ordered child welfare reforms, and meet other serious needs for our state and citizens. Instead, we’ve allowed this unnecessary and unaffordable tax giveaway to grow unchecked.
As the energy boom fades in the face of plummeting gas prices, we may only be able to look back with sorrow and anger at a huge missed opportunity to invest in Oklahomans and keep wealth in our state.