As the leader of a philanthropic organization built from the largesse of the oil and gas business in Oklahoma, I see every day the impact the energy industry has on this state. Whether it's the early childhood or economic development work of the George Kaiser Family Foundation or the education reform efforts of the Charles and Lynn Schusterman Family Foundation, the energy business has fueled progress. Those who have benefited from the industry set the bar for generosity. This industry is the backbone of our economy.
However, the importance of Oklahoma's energy sector doesn't dismiss us from the responsibility to weigh the effectiveness of public policy. At issue is a tax incentive the Legislature passed in the final hours of the 2010 session to promote horizontal drilling. Last week, state Finance Secretary Preston Doerflinger showed the gross production tax collections to the general revenue fund dropped $209 million in fiscal year 2013. This loss, which is entirely due to the 2010 law, is projected to be worse next year.
The incentive is complicated. For more than 40 years, the gross production tax for most drilling was around 7 percent. Fluctuation in prices dictated tax rates, including keeping taxes low during the recoupment of drilling expenses.
In 2010, legislators created a windfall for producers by taking the tax to 1 percent on all horizontal drilling in the name of “making Oklahoma energy companies competitive” in comparison to neighboring states. The 1 percent was regardless of the price of oil or gas. If oil was $150 per barrel or $60 per barrel and well production costs had been recouped, the 1 percent level remained. Since 2010, nearly all wells drilled in Oklahoma are horizontal. The one-year forecast for oil is over $100 per barrel.
Incentives must be evaluated regularly to ensure they promote an activity that otherwise wouldn't happen. In this instance, the special rate of 1 percent has nothing to do with the enormous amount of horizontal drilling taking place in Oklahoma. The market opportunity dictates the drilling. The same activity is taxed at roughly 11.5 percent in North Dakota. Guess what? They're drilling like mad in North Dakota! If the gross production tax returns to its historic rate of 7 percent in Oklahoma, producers will still be drilling the same wells because the free market makes it worth it.
We can thank our amazing citizens and energy companies for extracting oil and gas from beneath us, generating great wealth and opportunity for countless Oklahomans. Legislators had defensible intentions in passing the incentive in 2010, but we are now in 2013. Critical needs like crumbling roads and education reforms have suffered from revenue shortages as a result of an incentive that serves no effective purpose.
It's time to gather around a table and figure out a smarter way.
Levit is executive director of the George Kaiser Family Foundation in Tulsa.