Report makes case for oil and gas tax breaks (Capital City)

By Ben Felder

A report from the State Chamber of Oklahoma’s Research Foundation on oil and gas policy comes short of making specific recommendations to lawmakers, but it does outline evidence of the benefit of continued tax breaks for the state’s largest industry.

The report comes just a few weeks before the start of a new legislative session when oil and gas tax breaks are expected to be a major topic of discussion.

The oil and gas industry accounts for the largest source of capital spending in the state with drilling expenditures totaling $11.7 billion in 2012, according to the report. Oklahoma currently draws 13.5 percent of its revenue from the oil and gas sector, which is similar to the share in the 1970’s and 80’s during the last oil boom.

“One of the biggest issues facing the Legislature this session is continuing to work on oil and gas tax policy,” Chamber President Fred Morgan said at a Tuesday press conference to release the report. “[This reports is] to provide policy makers comprehensive information on the impact of the oil and gas industry on the economy of Oklahoma.”

The report does not offer specific policy recommendations, but it does outline negative effects of higher taxes on the oil and gas industry. Those negative effects include reduction in current production, reduced royalty income, drops in property value and a reduced corporate presence, according to the report.

“This study shows that Oklahoma’s current tax structure for the oil and natural gas industry works,” said Cody Bannister, vice president of communications for the Oklahoma Independent Petroleum Association. “Efforts to increase taxes on Oklahoma’s most vibrant industry will do nothing but hamper our economy.”

Some of the state’s highest ranking officials have already called for changes to the tax structure, including Oklahoma Treasurer Ken Miller who said a review of the state’s tax policy on drilling should take place, especially as the state experienced humble economic growth in 2013.

“I think that examination may show that incremental changes in the current incentive rate, in turn, may be needed, or it could reveal that comprehensive changes in energy tax policy would better provide stability for increasing global capital,” Miller said.

The Oklahoma Policy Institute has also highlighted loss revenue to the state through oil and gas tax breaks, claiming Oklahoma will lose around $300 million in the next fiscal year, which is almost double the expected revenue shortfall.

“The tax break for horizontal drilling, which is taxed at 1 percent for the first 48 months of production rather than at the 7 percent rate for traditional production, is estimated at $251 million in FY 2014 and $237 million in FY 2015,” the Policy Institute reported this month. “The remaining breaks are for deep well production, which is taxed at 4 percent, and for other forms of production – 3-D seismic shoots, at-risk wells, inactive wells, enhanced recovery projects, and new discovery wells – on which producers can claim rebates for tax paid.”

The 1 percent tax rate is set is expire in 2015.

The debate is not just contained to party lines, as Republicans have shown signs of disagreement on what the permanent tax rate should be. Gov. Mary Fallin has expressed support of finding a rate higher than 1 percent, while House Speaker T.W. Shannon has said he wants to keep the rate at 1 percent.

Supporters of the current tax rate will find the chamber’s report to outline the case for why the current rate should continue. But as revenue levels remain anemic and the oil and gas industry continues to grow, the debate over tax rates will be a hot topic in the coming months.


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