Tribal Opposition To New Oil Tax Code Is Perplexing

News this morning is that, after state lawmakers reformed North Dakota’s obscenely byzantine oil tax into a flatter and slightly lower rate earlier this year, the leadership of the Three Affiliated Tribes on the Fort Berthold Reservation are balking at signing a new tax agreement with the state.

The current agreement expires at the end of the month, and state leaders are hopeful to sign a new one. The tribes, however, don’t like the reforms lawmakers passed.

“We think it’s a tolerable rate, even in this climate of $40-a-barrel oil, and it’s going to climb, and we know it’s going to climb,” Chairman Mark Fox told reporter Mike Nowatzki. “Our position is we have an agreement that was in place before the Legislature took action.”

That’s certainly true. The state and the tribes did have an agreement on oil tax revenues predating the reforms passed earlier this year, but so what? Does that mean lawmakers were shackled to the status quo?

Let’s be clear on what we’d be facing if lawmakers hadn’t acted earlier this year.

[mks_pullquote align=”right” width=”300″ size=”24″ bg_color=”#ffffff” txt_color=”#000000″]There’s nothing state lawmakers can do about the vagaries of the oil and gas markets, but they did act to make the oil tax code produce a more steady and reliable stream of revenue. Tribal officials should be thankful.[/mks_pullquote]

For one thing, the state’s finances would be a mess. There’s already anxiety over the fact that, through November, state tax revenues have fallen $152 million behind the forecast lawmakers used to budget. Had lawmakers not reformed the oil tax that significant gap would become a disastrous gulf as low oil prices would have triggered a tax exemption for the oil industry. Thanks to the reforms, the current oil tax rate is 10 percent. That’s down from a top effective rate of about 11 percent before the reforms but well above the 6.3 percent rate an oil industry insider estimated as the effective rate under the trigger.

For another, the tribe is benefiting from that higher rate too. Under the oil tax agreement, the tribe and the state split the revenues from oil development on the reservation. The tribe says they think the 10 percent rate the industry is paying now is too low, but if lawmakers hadn’t acted the industry would be paying 6.3 percent and the tribe’s share of the revenues would be significantly lower.

As it stands, the tribe is currently getting approximately $10 million per month in oil tax revenues. While that’s down from the $25 million per-month windfall the tribe was enjoying during the peak of the boom, it’s significantly higher thanks the elimination of the trigger.

There’s nothing state lawmakers can do about the vagaries of the oil and gas markets, but they did act to make the oil tax code produce a more steady and reliable stream of revenue.

Tribal officials should be thankful. In fact, I’m left perplexed as to what, exactly, their problem is.

The tribes are sovereign, and if they wish to withdraw from the oil tax agreement and go back to a separate code that’s their right. But it’s worth remembering that prior to the agreement with the state that separate taxing regime resulted in zero oil development on the reservation. Re-instituting a separate tax code amid a global oil price rout would likely prove disastrous to oil development on the reservation, and leave the tribe with far less revenue than they’re collecting now.

Tribal officials seem to have forgotten what it means to strike a bargain. They have benefited significantly from their partnership with the state on oil taxes, but part of what they gave up when they entered that agreement was autonomy over oil tax policy. I understand that after the questionable leadership of former tribal chairman (and Heidi Heitkamp crony) Tex Hall, Chairman Fox wants to make it clear that he’s acting as a good steward of his people’s interests in oil and gas development.

If Fox is playing this out to make a point, and maybe position the tribes for some leverage on future changes to the tax code, then that’s fine. Smart, even.

But if Fox is seriously considering withdrawing from the tax compact over reforms that have actually increased the revenues the tribe is currently receiving then it’s time to question his leadership.

That decision would be a disaster for the tribe.