WHEN a Democratic legislator accused Republicans of wanting to sell surplus water to Texas to offset the cost of income tax cuts, he was clearly out of his intellectual depth.
Treatment of another liquid found at a greater depth than groundwater really could offset income tax cuts. It involves tax credits and rebates for horizontal oil and gas drilling. They’re reducing gross production tax receipts to meager levels.
State Secretary of Finance Preston Doerflinger is among officials who question the continued need for the credit. A conservative view is that upping the take from gross production taxes could help average citizens pay lower income taxes. The Oklahoma Policy Institute, a longtime foe of the credit, would rather the money go to state services than to tax cuts.
Regardless of where it goes, the time is right to discuss ending a well-intentioned but perhaps anachronistic tax credit. Doerflinger isn’t pushing elimination of the credits so much as he is urging a serious discussion of the matter.
Steep declines in gross production tax collections dampened an otherwise positive revenue picture for the fiscal year that ended June 30. General revenue was boosted by a nearly $250 million gain in income tax and sales tax collections. Receipts from gross production taxes, however, fell by nearly 50 percent.
The Oklahoma economic miracle hasn’t come to a screeching halt, but it has slowed. Higher unemployment and lower income tax and sales tax collections late in the fiscal year are signs of slower growth. Doerflinger said it’s increasingly unlikely the state can make a deposit in the Rainy Day Fund this summer.
Oklahoma Tax Commission figures show that rebates, refunds and tax credits linked to oil and gas exploration cost the state $321 million in fiscal 2013. The tax rate on horizontal wells is just 1 percent for 48 months after the start of production. This 1 percent is paid to counties and schools; the state general revenue fund gets nothing.
A 2010 change in the law removed a provision to stop the lower tax rate (it would normally be 7 percent instead of 1 percent) once the cost of a well is recovered. Restoring this provision is a step toward revising state tax policy, but Doerflinger questions whether the time has come to do away with tax credits for horizontal drilling. Such drilling is no longer considered especially risky.
“The boom in the energy industry is improving Oklahoma’s economy in so many ways,” Doerflinger said, “but the general revenue fund isn’t seeing the benefits it would have before 2010 ... In our estimation, policymakers should consider revisiting this law in consultation with the energy industry to determine whether it is fair and equitable to the industry, the state and all its taxpayers.”
Of the 174 active rigs listed in a recent census for Oklahoma, 161 involved horizontal drilling. Is it responsible, Doerflinger asks, for government to give money away as an incentive if no incentive is needed?
It’s tempting but oversimplistic to cast this issue as a giveaway to the “rich” at the expense of the poor. Tax credits for risky drilling ventures arose due to competitive pressure — if other states offered them, Oklahoma had to consider doing likewise. Don’t blame energy firms for taking advantage of credits. Ordinary citizens take advantage of tax credits on individual income tax returns.
Doerflinger has consulted with people on both sides of the drilling credit issue. He came to the conclusion that a fiscally responsible policymaker “needs to seriously consider at what level government should incentivize something that is now standard practice.”
He’s right. Now if only we could sell some of that surplus water ...