Both sides in a hearing before a state Supreme Court referee agreed Tuesday that the Oklahoma Constitution sets a certain procedure for how the Legislature must handle revenue bills. They also agreed that this procedure wasn’t followed when lawmakers approved a bill setting a production tax for oil and natural gas.
The major disagreement is whether the measure should be defined as a revenue bill requiring this special treatment.
Oklahoma City Attorney Jerry Fent says it absolutely is. Oklahoma Solicitor General Patrick Wyrick says it most certainly is not.
Fent is asking the court to rule House Bill 2562 unconstitutional. It was signed into law by Gov. Mary Fallin on May 28, setting the oil and natural gas production tax at 2 percent for the first 36 months of production. It then increases to 7 percent.
He told Daniel Karim, the referee, that the Legislature violated provisions in the Oklahoma Constitution requiring that revenue bills not be enacted during the last five days of the legislative session, that they must be supported by a three-fourths vote of the House and Senate and that they must not go into effect until 90 days after the session.
“We must enforce the constitution on every bill regardless whether it hurts us or helps us,” Fent said. “If you don’t attack any violation of the constitution, you agree that any violation is OK.”
He said even if the measure is revenue neutral, that’s not important. He said the constitution references revenue bills but makes no distinction on whether these bills increase or decrease revenue.
The state historically has assessed a 7 percent tax on production. In 1994, the Legislature created an incentive for horizontal drilling which lowered the tax rate to 1 percent for the first two years. In 2002, the incentive was extended to up to four years. The incentive program was set to expire July of next year, which would return the tax rate to 7 percent.
Wyrick said the measure provides a continued incentive for drilling by setting the tax at 2 percent for the first 36 months of production. He compared it to a law that provides Oklahomans a sales tax-free weekend, which begins this Friday and ends Sunday.
“When the clocks strikes midnight on Sunday, your honor, and that exemption expires, nobody is going to stand up and claim their sales tax was just raised,” he said.
Wyrick said the court has long supported the principle that revenue bills are those which increase revenue. He said the bill does not do that. The intent of the constitutional provision, he said, was never meant to apply to those that do not increase revenue.
The oil industry has a huge financial impact on the state and, if the court rules in Fent’s favor, it could lead to a 600 percent spike in the production tax, he said, which would be harmful to the state’s economy.
Since it will be another year until the old incentive program expires, the Legislature, if necessary, would have time to take up the issue again and follow constitutional procedures for a revenue bill.
“Often there is an opportunity for legislative correction; is there one here?” Karim asked Wyrick.
“I suppose the Legislature in the next session could come in and try to get something done,” he said, but he noted that the prospect of getting a three-fourths majority could be problematic and such a delay would be harmful to an industry that needs lead time to plan its investments and drilling programs.
Karim will submit a report on the case to the Oklahoma Supreme Court.
Fent also is suing over a law to make a small, conditional cut in the state income tax. He said the Legislature violated the state constitution in the way it passed that measure. A previous attempt at an incremental cut of state income taxes was tossed out by the state Supreme Court late last year based on another lawsuit filed by Fent.
When the clocks strikes midnight on Sunday, your honor, and that exemption expires, nobody is going to stand up and claim their sales tax was just raised.”