Here in North Dakota we’ve been having a debate about lowering and simplifying the oil extraction tax. Unfortunately, that debate has been met with a rather short-sighted response from some who seem to be of the attitude that we should squeeze every tax dollar out of the oil companies we can before the boom ends.
Of course, there’s a smarter way to think about this. Rather than sticking it to the oil companies, why not keep our taxes in the state competitive so that the oil boom goes beyond mere “boom” and becomes a long-lasting, reliable part of our economy?
It’s a lesson Alaska is learning right now. They raised their oil taxes under Sarah Palin, something opponents of fixing North Dakota’s oil tax were quick to point out, but now Alaska is seeing a drop off in oil production as oil companies go to more competitive tax environments.
Alaska increased its oil taxes in 2007, adding a stiff escalator when oil prices rise. “Exploration just stopped,” Schafer said, and the economic falloff statewide “affected not only the oil companies but also truck drivers, seismologists, monitoring guys, work-over rigs — they all get hurt.
“Tax competitiveness is a factor in investment,” he said, and “that’s why Alaska is losing production and its ability to pay the bills. As soon as that tax increase went in, new drilling started going away.
“The point it makes for North Dakota is this: The time to do it (lower taxes) is not after production has dropped. The time to do it is when your production levels are up and you can keep it going.”
Alaska governor: Look to N. Dakota
More than 300 people attended a noon lunch Friday in Fairbanks and heard speakers say the state must lower its taxes to stop a decline in oil flowing through the trans-Alaska pipeline — down a third from its peak in 1988.
Speakers pointed to rapid drilling expansion and rising oil production in North Dakota, where 170 exploratory drill rigs are operating. No exploratory rigs are operating now on Alaska’s North Slope.
Alaska Gov. Sean Parnell, who has proposed an oil tax reduction plan, also has cited North Dakota, which ranks fourth in U.S. oil production (355,000 barrels per day and rising) while Alaska ranks third (about 600,000 barrels per day and declining).
“These are times when I see companies voting with their feet and moving to North Dakota,” Parnell said last week, according to the Fairbanks Daily News-Miner newspaper.
Some may still ask why North Dakota should lower its tax when we’re the destination of oil companies looking for more competitive tax rates. The answer, of course, is to stay competitive.
Lowering our oil extraction tax has innumerable benefits. It would make our oil play more resilient to changing market and regulatory pressures. It would also make development around the more marginal oil deposits in the state possible for a profit, something that would in turn spread the impact of oil development in the state and, in turn, spread the impact on infrastructure.
And we also need to keep in mind that the oil extraction tax isn’t the only revenue stream oil development is driving. If we cut and simplify that tax we will see a loss in revenues, but that loss will be more than made up for by increased development driving other taxes such as property, sales and income taxes.
The goal of government policy should never be to maximize revenues – we’re talking about government here, not business – but there’s no denying the positive economic impact simplifying and lowering this tax would have.
Many have written off this tax cut debate, saying the time isn’t right. They’re wrong. The time is right, because the wrong time would be to wait until our oil boom plateaus or, worse, begins to decline taking tax revenues along with it.