Serious efforts are underway at our state Capitol to raise taxes on job creators who drill for crude oil and natural gas within Oklahoma’s borders. Yes, in a state with Republican supermajority control, tax increases are in play.
This is puzzling since, in Oklahoma, total state tax collections and total state government spending are already at all-time highs.
The tax in question is Oklahoma’s gross production tax, also called a severance tax, assessed on those who drill for oil and natural gas. Oklahoma’s severance tax is 7 percent, based on how many barrels of oil or thousand cubic feet of natural gas are extracted.
For horizontal and deep wells, the tax is 1 percent the first four years of production. This lower rate expires periodically and must be renewed by the Legislature. It’s due to expire July 1, 2015. Lawmakers are considering raising it even earlier.
Oklahoma’s economic resurgence has tracked closely with the rise of horizontal drilling, combined with hydraulic fracturing, as a method for pulling oil and natural gas from previously untapped geological formations.
Many Oklahoma employers have been at the forefront of these innovations. Their successes have resulted in robust job creation statewide and helped insulate Oklahoma from the worst of the global recession.
For better or worse, research suggests Oklahoma is as reliant on energy sector activity today as it was in 1982, prior to the oil bust that set our state’s economy back a generation.
Oil and gas drillers in Oklahoma carry more of the state’s tax burden than any other industry. In 2012, direct state taxes paid by Oklahoma oil and gas producers, proprietors and employees equaled 22 percent of total tax collections.
This doesn’t even include local taxes, or taxes paid by those engaged in refining, pipeline activity or other steps in moving the product to market.
Still, some imply Oklahoma drillers may not be contributing their fair share. This resembles the Obama administration’s rhetoric toward energy producers and the private sector in general.
When deciding where to drill, oil and gas producers can choose from numerous regions across the continent. Many factors, below ground and above, are considered. A tax increase is a cost increase, affecting a well’s profitability.
Some states rich in oil and gas, like North Dakota, have higher severance tax rates than Oklahoma. Others, like Pennsylvania, assess none.
Nearby states, including Texas, Louisiana and Arkansas, offer incentives similar to Oklahoma’s low rate for horizontal and deep wells.
Oklahoma competes to attract producers to drill here. Millions of dollars in jobs, opportunity, infrastructure and investment are at stake with each new well.
If equity between different types of wells is a concern, lawmakers can reduce Oklahoma’s 7 percent tax on older wells, vertical wells, stripper wells and the like. This can be done without increasing other taxes.
Starting with right to work in 2001, Oklahoma has done much to become more appealing to employers. Raising taxes on highly productive job-creators sends a poor message and could have damaging unintended consequences.
Bond is CEO of OCPA Impact, Inc., an Oklahoma-focused, nonpartisan issue advocacy organization.