Fix The Damn Oil Tax Already

On the 70th day of the state’s 80 legislative session Republican leaders in the House and Senate have proposed a major reform to oil tax policy. Already it is being met anger from partisan Democrats hoping to inflame the public’s hatred for “big oil,” but it’s time to cut through that nonsense.

It’s time to fix the damn oil tax.

Let me explain why.

In 2001 lawmakers created a trigger eliminating the oil extraction tax when prices fall below a certain price. The idea was to provide a tax stimulus for oil production at lower prices.

That year the state averaged less than 90,000 barrels per day in production, and the potential impact to state revenues  was an acceptable trade off for the stimulus provided oil producers.

Things have changed.

In 2015 so far the daily oil production in North Dakota is over 1.1 million barrels, or roughly 1,122 percent than in 2001 (see chart to the right). The potential impact of this tax trigger is measured in the billions of dollars. In fact the revenue forecast lawmakers in Bismarck are using to budget sees this oil tax trigger kicking for 11 months of the next biennium, costing the state well over $5 billion.

Put that number into perspective: The state’s total appropriations in the 2005-2007 biennium – including the general fund, special funds, and federal dollars – was under $4.35 billion.

That’s right. In the coming biennium this tax trigger could cost the state a sum of money that’s about a billion dollars more than the state’s total budget from a decade ago.

In 2015 what once seemed prudent tax policy is now a ticking time bomb which ties billions of tax dollars to notoriously volatile oil prices.

Here’s what Republicans want: When the trigger hits in the coming biennium – probably on June 1st – instead of eliminating the state’s oil extraction tax it would instead be lowered permanently from 6.5 percent to 4.5 percent. That would, combined with the 5 percent oil production tax, bring North Dakota’s total oil tax down from 11.5 percent to a flat 9.5 percent.

The state would lose out on some tax revenues in the long term thanks to the permanent reduction in the rate, but this revenue land mine would be banished from the tax code.

Hated “big oil” would lose out on a massive tax cut when they need it the most – I’m sure you’re aware of the impacts of scuffling oil prices on the state’s oil producers – but they’d gain a slightly lower overall tax long-term and a more predictable sort of tax structure.

This is what compromise looks like. Both the state and the oil industry feel some pain to achieve a more predictable tax code.

The only problem is the timing. This shouldn’t have been proposed on the 70th day of an 80 day legislative session. Heck, it should have been passed back in 2011 when former Governor Ed Schafer, whose advice on sound policy for our state should never be dismissed lightly, first proposed it.

[mks_pullquote align=”left” width=”300″ size=”24″ bg_color=”#000000″ txt_color=”#ffffff”]This is what compromise looks like. Both the state and the oil industry feel some pain to achieve a more predictable tax code.[/mks_pullquote]

But partisan politics playing on shallow public perceptions of “big oil” have always been the obstacle for this reform. The Republican-dominated legislature shot down similar proposals in 2011 and 2013 because they were afraid Democrats would turn “tax cuts for big oil” into an effective campaign strategy.

Clearly, Republicans feel that falling oil prices and the looming loss of billions in tax revenues have created a more fertile environment for this idea, but Democrats still hate it.

“It is an arrogant power tactic that has no place in North Dakota policy making,” Senator Mac Schneider and Rep. Kenton Onstad, the leaders of the Democrat minorities in their respective chambers, have said of the proposal in a column published in the state’s newspapers.

That’s partisan politics talking. Democrats have dug themselves a hole on this issue, and it’s only a stubborn refusal to admit that they were wrong which keeps them in it.

That this proposal comes so late in the current legislative session is regrettable, but it’s not like this is a new issue. The time has finally come to fix the tax.