In Defense Of Ed Schafer And Flattening North Dakota’s Oil Extraction Tax

Tweet

Written By:
Rob Port

Feb 1, 2011
2:42am

I must say that I’m a little shocked at the initial reactions from some to Governor Ed Schafer’s proposal for a simpler, flat-rate oil extraction tax (read more about it here). There seems to be a lot of populist chest-thumping going on at the expense of “big oil,” in many cases coming from those who are already proponents of spending every penny of revenue the state is raking in right now.

Here are some inconvenient truths for the talking points being thrown around by the spend-every-penny crowd that I hope will lend to a more thoughtful debate on this subject going forward.

First, the “tax cuts for big oil” meme. Let’s keep in mind that calling Schafer’s proposal a mere “tax cut for big oil” is a rather shallow analysis. What Schafer is calling for is a flat rate that, while reducing taxation at higher oil prices, would also mean eliminating the tax breaks oil companies get at lower oil prices. It’s important to keep in mind that the oil industry would be giving up some tax protections in order to get a flat tax.

We citizens should want all forms of the tax code to be simplified. Not only does it save us tax dollars in terms of enforcing the tax code, keep in mind that all taxes are ultimately paid by the end user of a good/service. Keeping taxes higher and more complicated than they need to be only serves to inflate prices.

Second, some seem to be under the impression that simplifying the oil extraction tax to a flat rate would deny the state needed funds for infrastructure maintenance. This is simply not true, and I have to wonder how closely those espousing this talking point really follow the state’s fiscal matters.

Schafer’s proposals are embodied by legislation introduced by Dickinson Democrat Rep. Shirley Meyer, whose HB1420 would lower the oil extraction tax from 6.5% with “triggers” and “exemptions” based on oil prices to a flat 4.5% that would be applied without exemptions or triggers. The fiscal impact of this bill as calculated by the Office of the State Tax Commissioner would be $371 million in the next biennium. That’s almost undoubtedly too high given what we know about lowering tax rates leading to increase tax revenues, but I’ll stipulate to it.

In Governor Jack Dalrymple’s proposed budget he calls for $958 million in spending on western infrastructure in the next biennium, part of a roughly 23% increase in state spending (once you account for the Governor’s budgeting gimmicks). This is about $58 million more than the Upper Great Plains Institute calculated was needed in western infrastructure spending over the next twenty years. Despite this arguably excessive level of spending, the Governor’s budget projects a $1 billion surplus.

If Meyer’s bill passes, the surplus (assuming all other parts of the Governor’s budget go through as planned) goes from $1 billion to $629 million. Thus, those claiming that this simplification of the oil extract tax would come at the expense of infrastructure spending simply don’t have their facts straight.

In fact, there don’t seem to be a lot of facts being used at all to oppose this proposed tax simplification and that’s unfortunate. North Dakota, and this issue specifically, deserves a better sort of discourse.