Oil Extraction Tax Simplification Offered In State Senate As An Amendment

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Written By:
Rob Port

Mar 16, 2011
11:57pm

House Majority Leader Al Carlson today introduced an amendment bringing the oil extraction tax issue back to the forefront of debate in the state legislature. It’s not exactly what was proposed previously – which was a lowering of the tax combined with a simplification – but it is an improvement over the existing tax:

Republican Majority Leader Al Carlson (R-Fargo) introduced an amendment to HB 1467, substantially changing the bill on oil tax price triggers in the Senate Finance and Taxation Committee hearing this morning.

The amendment would eliminate the use of price triggers and greatly simplify North Dakota’s oil extraction tax rate using a novel approach which would gradually lower the tax rate over time as statewide oil production levels increase. This type of tax adjustment has never before been considered by the legislature.

Carlson said that House majority leadership waited to introduce the unique plan until after the House had approved putting over $470 million into oil producing counties in an effort to ease potential fears that any decrease in the tax would leave in counties’ infrastructure needs unmet.

Many in North Dakotans fear a repeat of the 1980’s “boom-bust” cycle which was largely the result of major declines in the price of oil and want legislators to do something now to prevent a similar scenario from happening.

North Dakota’s oil extraction tax is complicated to decipher, with a number of targeted, short term incentive breaks and fluctuating tax rates dependent upon average crude benchmark prices. In addition, when oil prices are above $50 per barrel, the extraction tax is the highest in the lower 48 states, at 11.5%. In comparison, Montana has a 9.25% rate, South Dakota 4% and Wyoming 0%.

The amendment, which Ness called a “pay for performance” bill, lowers the tax rate incrementally as statewide production levels are reached. For example, the first 0.5% reduction occurs only when production reaches 425,000 barrels per month of production. The rates can continue to go down until statewide production levels reach 750,000 barrels and a corresponding flat 9.0% rate. All price triggers and almost all of the targeted incentives would be eliminated. There is no fall back of rates.

Here’s video of Democrat Representative Shirley Meyer, who introduced the original legislation in the House which both cut the tax and simplified it, testifying in favor of this new amendment:

Really, the oil extraction tax should be lowered and simplified. As Rep. Meyer notes in the video, right now nobody in the state can accurately project tax rates given that the current tax rate is based on oil prices. This creates uncertainty, and uncertainty is the last thing we want when it comes to oil producers deciding whether or not to drill here.

This amendment removes much of that uncertainty by unhooking the level of the tax from oil prices.

Someone will continue to attack even this watered down version of the original common sense proposal on the notion that we ought to soak the oil companies for as much as possible with no heed given for the future sustainability of the industry in the state, but they’re wrong.

Let’s hope this amendment passes.