Sen. Lonnie Laffen: Democrats Doomed Meaningful Oil Tax Reforms

The North Dakota legislature will grapple with many challenging issues during the upcoming session. Issues of infrastructure, tax relief, and education top the list. While not as top-of-the-mind as these perennial legislative debates, perhaps the most daunting challenge will be what, if anything, to do about our state’s oil tax structure.

[mks_pullquote align=”right” width=”300″ size=”24″ bg_color=”#000000″ txt_color=”#ffffff”]”Republicans attempted to fix this problem in the last legislative session by eliminating all production and price triggers and replacing them with a flat extraction tax rate of 5% beginning in 2017 instead of the current, variable rate of 6.5%. Democrats, led by Senate Minority Leader Mac Schneider, attacked Republicans by portraying this fix as a massive tax cut despite the bill’s fiscal note showing it would result in a $200 million tax increase.”[/mks_pullquote]

Put into place in the 1980s to spur development, our state’s oil tax structure is based on a 5% production tax and a 6.5% oil extraction tax for a combined 11.5% total oil tax. The 6.5% oil extraction tax also has a series of built-in triggers that can reduce or eliminate the extraction tax depending on varying price and production circumstances.

The imminent concern with the current oil extraction tax structure is the price trigger that eliminates the 6.5% extraction tax on new wells and reduces the extraction tax on all other wells to 4% if the average monthly price of benchmark West Texas Intermediate (WTI) crude falls below $55 per barrel for five consecutive months. With the current WTI price hovering at $55, North Dakota is faced with the real possibility that these triggers could take effect and reduce oil tax collections by $5 billion in the next biennium.

Republicans attempted to fix this problem in the last legislative session by eliminating all production and price triggers and replacing them with a flat extraction tax rate of 5% beginning in 2017 instead of the current, variable rate of 6.5%. Democrats, led by Senate Minority Leader Mac Schneider, attacked Republicans by portraying this fix as a massive tax cut despite the bill’s fiscal note showing it would result in a $200 million tax increase.

Unfortunately, this partisan assault worked and we were forced to abandon our efforts to deal with this complex and challenging issue.

Some have suggested we eliminate the triggers without an offsetting reduction in the overall tax rate, but that action would result in a massive tax increase on the oil industry and mineral owners. Due to the low price of oil, our state is already seeing reductions in private sector investment, good paying jobs and the tax revenue necessary to make needed public sector investments in road, school, water, flood control and public safety infrastructure. Such an oil tax increase would only make matters worse.

So the question remains, what do we do now? With oil prices dropping and the toxic political environment, finding a solution is all the more challenging. In fact, it may not even be possible this session as any fix would result in a massive tax increase on the oil industry at a time when they and related industries are already cutting back on employment, development and investment in North Dakota.

North Dakota is in the position we are as a state because of our history of making sound policy decisions. We will be studying the issue of oil taxes closely during the 2015 session. Whether or not we can fix this problem during the 2015 session remains to be seen, but one thing is certain, to do so, the Democrats will have to reject the partisan politics that doomed these efforts two years ago.