The incredible disappearing gross production tax

With all the attention last legislative session on the failed attempt to do away with the state personal income tax, a potentially bigger story seems to have escaped most people’s notice: the effective disappearance of the gross production tax.

This week, Secretary of Finance Preston Doerflinger announced General Revenue (GR) collections for November, the fifth month of FY 2013. For the month, the GR fund collected $0 from gross production tax revenues; year-to-date, gross production collections to GR are a miniscule $6.7 million. The graph below shows how FY 2013 gross production collections compare to prior years: since 2001 (the earliest year for which we have monthly data), gross production revenues through November have averaged $194 million and have never been less than $94 million.

Several factors are contributing to the extreme weakness in gross production tax collections:

• Low natural gas prices have limited production and tax receipts. While prices have rebounded since April, the average monthly price for natural gas remained below $3 per MCF through September. (Revenues from oil production are not allocated to the General Revenue fund until they’ve surpassed $150 million for the fiscal year, which should occur beginning in December or January).
• The state is paying back oil and gas producers for deferred tax credits. In 2010, a deal was struck between state leaders and the energy industry to defer payment on tax rebates owed the industry for horizontal and deep well drilling. The industry accrued $297 million in rebates that are now being paid out over 36 months. November’s rebate payment was $14.6 million.
• Perhaps most significantly, the state is not collecting tax on most horizontal drilling. Horizontal production is exempted from taxation for 48 months from initial production. As of 2011, over 40 percent of Oklahoma oil and gas production is from horizontal wells, and almost all new production is being drilled horizontally. 

As we have argued recently, the tax breaks provided for horizontal drilling have become unaffordable and unnecessary. Now we see that the impact of the tax breaks provided for horizontal drilling is being felt even more quickly and dramatically than most anticipated.  General Revenue collections for November were $28.1 million below the certified estimate, $16.7 million of which was due to the shortfall in gross production tax revenues. Year to date, gross production tax revenues are a full $94 million, or 93 percent, below the certified estimate; as a result, total GR collections are barely keeping pace with the estimate, running just 1.6 percent, or $33 million ahead. For the full year, gross production taxes were expected to contribute $377 million in general revenue.

Although it is unlikely that the state will face budget shortfalls requiring mid-year cuts, the weakness in gross production collections is significantly impairing our efforts to fund the public services that enable our families, communities and businesses to prosper. Our elected leaders must take action during the 2013 legislative session to address our disappearing gross production taxes by curbing  tax preferences for horizontal and deep well drilling.