It's Time For North Dakota's Oil Tax Reformers To Say "I Told You So"

Earlier today North Dakota lawmakers announced a revenue projection that is much more pessimistic than the one Governor Jack Dalrymple used for his budget address in December. It’s being widely reported that the projection would reduce state revenues by more than $4 billion, but there aren’t a lot of details about where that hammer is going to fall.

It turns out that lawmakers are expecting the hit to be over $5 billion counting losses to the general fund and special funds both for the rest of this biennium and next biennium.

A friendly lawmaker forwarded me the documents prepared by Legislative Council regarding revenues, which you can see below.

Here’s what lawmakers see happening to the state’s general fund for the rest of the 2013-2015 biennium (which ends on June 30th) and the two years of the 2015-2017 biennium (which begins on July 1st).

The figures, as noted, are changes from the December revenue forecast used by Governor Dalrymple:

That’s a $680 million total hit for the general fund alone through the end of the next biennium.

Now, in terms of oil and gas tax revenues, the state is projecting a more than $761 million reduction in revenues for the rest of the 2013-2015 biennium, and a $4 billion reduction for the 2015-2017 biennium:

So which revenue streams will these funds come out of? For the 2015-2017 biennium, lawmakers are expecting the hit to come in the form of lower income and sales tax revenues:

You can read the document below for the assumptions used, but basically they’re predicting less income (declines in oil royalties and layoffs) and less economic activity subject to the sales tax. Pretty obvious stuff.

Meanwhile, the big drop in oil and gas tax revenues for the 2015-2017 biennium is expected to hit mostly revenues to the state’s Legacy and SIIF funds, among others:

When policymakers say the “sky isn’t falling” because of these revenues, this is why they’re saying it. The biggest hit from falling oil taxes is revenues to the state’s special funds. The impact to the general fund, which constitutes the bulk of the state’s on-going revenues, is much smaller.

But, the state does a lot of spending out of those special funds. In the current 2013-2015 biennium the state had total appropriations of about $10.3 billion. Of that total, about a third or $3.5 billion was spending out of special funds.

In the coming biennium, Governor Dalrymlpe’s executive budget called for increasing spending out of special funds by about 36 percent as this chart from Legislative Council shows.

Now that lawmakers are proposing a 48 percent decline in oil and gas tax revenues, can the state afford the nearly $5 billion in special fund spending Governor Dalrymple has proposed?

This brings me to the point I make in the headline: We really should have reformed the state’s oil taxes back in 2013 when we had a chance. There were a number of proposals in that session to pin the state’s oil taxes at a lower, flat rate and be rid of the “triggers” and other exemptions which are now throwing the state’s revenue forecasts into chaos.

Opponents laughed at the reforms, and attacked them as handouts to big oil, but if they’d pass the state would have a much more solid revenue standing right now. Which should be something we look for in tax policy right?

Flat, low, and predictable.

At the heart of this chaos in the state’s revenues is very, very stupid oil tax policy.