AS lawmakers debate whether to increase the gross production tax levied on horizontal drilling, they should keep in mind this old warning: If you want less of something, tax it more. Recent experience in Oklahoma shows that when taxes and fees become excessive, economic activity declines.
In 2010, facing a giant budget shortfall, lawmakers opted to increase many fees. Vending machine operators, in particular, were hit hard. Instead of paying a sales tax on items sold, vending machine operators buy a decal for a flat rate each year. In 2010, lawmakers voted to triple that fee, from $50 to $150.
Gov. Brad Henry defended fee increases at the time, saying budget writers were careful to “only increase fees that hadn’t been increased in literally decades to bring them up to the cost in general of the service provided. It would have been an easier exercise to just cut every agency by 15 or 20 percent and go home, but it would have left our economy in shambles.”
Instead, the fee increase made a shambles of the vending machine industry. According to Oklahoma Tax Commission records, the state had more than 54,000 vending machines at that time. By 2011, industry officials were projecting a 30 percent reduction in the number of machines due to the fee’s impact.
Rep. Charles Ortega, R-Altus, noted that lawmakers had expected the fee to generate $8.5 million. Instead, the fee’s real-world impact was likely to translate into “a loss of $6.5 million to the state by the time you factor in job reduction.” Within the year, lawmakers voted to roll back the fee to $75.
Today, a similar debate focuses on a far larger industry: oil and gas. Currently, a 1 percent gross production tax is levied on horizontal wells for the first four years of operation. That rate, initially enacted as a temporary incentive, is scheduled to expire in 2015. Other wells face a 7 percent tax.
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