Robert Harms: Oil Tax Change Is Good For North Dakota

The North Dakota Legislature is on the verge of passing monumental legislation to change the structure of North Dakota’s oil taxes by eliminating the triggers and putting the state and the industry on a more predictable and stable path. A lower permanent rate will encourage continued investment, boost production, and ultimately lead to more jobs and more stable revenue for the state.

The new proposal eliminates the triggers, but does allow the industry to enjoy a reduced tax rate of 5% for most of 2015, a tax cut many were planning for under the current law. That will be especially helpful during a time of low prices that has already led to over 50% of the drilling rigs to be laid down. The bill also sets a lower, permanent tax rate at 10%. That’s below the current rate, but reflects a compromise among industry, the tribes and law makers that will keep North Dakota competitive in an expanding world market that includes shale oil plays around the world.

Oil from North Dakota has reshaped the geopolitics of the world and made America more energy independent. In a way, we are victims of our own success, which has contributed to recent price declines. The technology has been proven and is being exported to other shale formations around the globe. The triggers were originally put in place in the 80’s to incentivize production with new technology in new shale formations that hadn’t been tapped before. That was 30 years ago. Our tax policy needs to be modernized, in view of low world oil prices, which will signal our interest in maintaining solid public policy for our business community.

[mks_pullquote align=”right” width=”300″ size=”24″ bg_color=”#000000″ txt_color=”#ffffff”]Republicans are no longer willing to gamble on a volatile oil market that takes wild swings far beyond our control. Long-term, predictable tax policy is good for everyone. [/mks_pullquote]

The bill has its opponents, who advance three arguments, all of which are flawed.

First, they claim the bill shouldn’t pass because it’s happening too fast, and at the end of the session. The legislature has spent the entire session trying to budget around the instability of plunging revenues inextricably tied to the volatile global oil market. After multiple forecasts, competing projections, and daily oil price tracking, it has become clear that there are simply too many “if/then” and “what-if” scenarios to plan around. A couple of pennies in the market could shift hundreds of millions of dollars to the state or the industry. Budgeting on the edge of a cliff is no way to run a state, or to expect an industry to function. That’s why Republicans are pushing these changes now. Moreover, the bill has been vetted in committee hearings, and amended to allow all parties to participate in its final form.

Second, opponents of this bill claim it isn’t fair to the oil industry to change tax policy midstream, to “pull the rug out from under them”. The bill provides a tax incentive during the balance of the year, and then goes to a lower flat rate. The truth is that lowering the rate is the right policy for the state and the oil industry in the long run. As the market rebounds, oil companies will be making decisions about where to ramp up production and will look for the best return on their investment. Just as the oil market is global so too is the market for investment dollars. North Dakota is a high cost of production state. Bakken crude is sold at a discount, and transportation costs to get the oil to market are high. We shouldn’t compound that with a non-competitive tax structure, too. Right now, North Dakota has one of the highest effective tax rates in the nation. In a “new normal” of lower oil prices and increasing global supply, that’s no place to be.

Finally, they argue that the long-term hit the state would take with a lower flatter rate would simply be too much. But they are diminishing the potential impact of the big trigger. If it hits and stays on the entire biennium the state will lose another $850 million. The longer it stays on, the more we lose. This bill helps mitigate concerns over revenue loss in the long-run because a lower, permanent tax policy will spur more investment, increase production, and lead to a more stable, robust economy.

Republicans are no longer willing to gamble on a volatile oil market that takes wild swings far beyond our control. Long-term, predictable tax policy is good for everyone. It signals to the oil industry our interest in being a business-friendly and responsive state in which to operate. Making this change will enable us to stabilize our revenues so that we can responsibly fund our priorities in infrastructure, education, and continue to provide property tax and individual tax relief for the people of North Dakota.

As this Session draws to a close, legislators in both chambers from both parties will have a chance to vote on this issue. Hopefully, the rhetoric can subside and legislators can come together in crafting a more predictable and stable tax policy for the long-term health of both the state and the oil industry.