Time to cap the tax credit well?

OK Policy has released a new fact sheet looking at Oklahoma’s gross production taxes on oil and gas,which takes a special look at the tax exemptions offered for different forms of production. Over the past five years, producers have claimed $339 million in exemptions, or rebates, from the gross production tax, with almost three-quarters of the rebates claimed for deep well drilling and horizontally drilled wells, according to data supplied by the Oklahoma Tax Commission.

Most gross production tax exemptions are set to expire on June 30, 2009. The Legislature is considering two bills – HB 2062 and SB 313 that would extend the exemptions through 2012. So far, both bills have sailed through the legislative process with a minimum of debate. However, the titles have been stricken from the bills and they look headed to conference committee, which ensures that the Legislature will have at least one more opportunity to consider the matter before any extension of the tax exemptions is sent to the Governor.

The state currently caps the rebates that can be claimed for deep wells drilled below 15,000 feet at $25 million per year. Most other exemptions are uncapped but can be claimed only when the average annual index price of natural gas is below $5.00 per MCF or the price of oil is below $50 per barrel. Exemptions for horizontally drilled wells are subject to neither a cap nor a price trigger; the state paid out over $35 million in rebates for horizontal drilling in FY ’08.

With the state now wrestling with what looks to be huge and prolonged budget shortfalls, this seems to be the right time for policymakers to carefully review these tax breaks for oil and gas producers and consider whether there should be caps on the amount of rebates that can be claimed for other forms of production, or a global cap for all oil and gas exemptions. This would limit the state’s exposure and create greater budget certainty over the coming years.

It is unlikely that the state will abandon drilling incentives entirely, and one can argue that during periods of low prices incentives can have an impact on the decision to drill. But we also know that schools, social services, public safety, and other vital areas of the state budget are in line for significant cuts. In this environment, putting a cap on the tax breaks offered to producers seems a reasonable way to minimize the impact of cuts to core services and ensure that sacrifices are shared.

Update:  The Oklahoman praised us for our “masterful analysis” of the issue but objected to ending the oil and gas tax exemptions because doing so would leave Oklahoma at a “competitive disadvantage” in relation to other states. I dunno – my mother always taught me that just because the other kids do it, it didn’t make it right.


Former Executive Director David Blatt joined OK Policy in 2008 and served as its Executive Director from 2010 to 2019. He previously served as Director of Public Policy for Community Action Project of Tulsa County and as a budget analyst for the Oklahoma State Senate. He has a Ph.D. in political science from Cornell University and a B.A. from the University of Alberta. David has been selected as Political Scientist of the Year by the Oklahoma Political Science Association, Local Social Justice Champion by the Dan Allen Center for Social Justice, and Public Citizen of the Year by the National Association of Social Workers.

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