North Dakota Could Have Avoided Revenue Headaches With Oil Tax Reform

Yesterday the state got some ugly news in the form of a forecast showing another $1 billion drop in tax revenues (that coming on top of a previously-released forecast in January showing a $5.5 billion drop from December).

Most of the problem is oil prices (though the agriculture industry has had some tough sledding of late as well), as you can tell from this graph I created yesterday showing the declining forecast for oil and gas revenues from the December forecast Governor Jack Dalrymple used for his budget address through the updated executive branch forecast released yesterday:

That’s a big decline, though to be fair this revenue flows mostly to the various funds the state has established like the Legacy Fund, etc. So the direct impact of this decline on the general fund budget is somewhat limited.

Still, the state does a lot of spending out of its special funds. They budgeted for about $1.46 billion in spending from special funds in the current biennium. So this decline still hurts.

Why is it happening? A decline in oil tax revenues amid falling oil prices and oil production isn’t surprising, but it wouldn’t be anywhere near this dramatic if the state had gone to a flat oil tax rate in previous sessions.

Because the most painful part of the forecast released yesterday (full document below) was this forecast for 11 months of no extraction tax thanks to the “big trigger” being invoked by low oil prices. The forecast sees the tax exemption kicking in on June 1st, and not letting up until May 1, 2016.

If the state had been rid of the trigger, in exchange for a lower flat tax rate on oil production and extraction, the revenue report yesterday wouldn’t have forecast anything near the wild swing in revenues it did.

The existence of the tax triggers in our oil tax policy creates a sort of fiscal cliff, both for the state and for the industry. It’s bad policy, and we should have been rid of it, but there was popular outcry against reform efforts in previous bienniums because it was seen as a gift to the industry. “Tax cuts for big oil,” the refrain went.

Those shortsighted opponents to these reforms should now be apologizing for the mess they helped create with the revenues. Even Democrats seem to be realizing the folly of opposing reform, given recent spin.

The Republican majority didn’t reform this tax because Democrats scared them with threats of making “tax cuts for big oil” a campaign issue. Shame on them. And the reality of the revenue situation apparently didn’t dawn on anyone in the legislature in time to get a bill before this session to fix it (perhaps something going to a flat tax after oil prices rebound above a certain price).

But the state’s current situation illustrates perfectly the stupidity of the anti-“big oil” chorus coming from some quarters. Reforming the oil tax code wasn’t just about helping big oil too. It was about helping avoid these exact sort of revenue headaches.