An Oklahoma City attorney who has successfully sued the state in the past filed a lawsuit Thursday with the state Supreme Court asking that it block as unconstitutional a new law setting the oil and natural gas production tax at 2 percent for the first 36 months of production.
Jerry Fent alleges in his lawsuit that the Legislature violated provisions in the Oklahoma Constitution that require that revenue bills not be enacted during the last five days of the legislative session, that they must have a three-fourths vote in the House and Senate and that they not take effect until 90 days after the Legislature adjourns its session.
A Supreme Court referee is to consider the lawsuit in a hearing on July 29 and issue a report to the full court.
Gov. Mary Fallin signed House Bill 2562 on May 28. The effective date for the law is Tuesday, but the new rate wouldn’t go into effect until July 1, 2015.
The state historically has assessed a 7 percent tax. In 1994, the Legislature created an incentive for horizontal drilling. The incentive initially 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 is set to expire July of next year, which would return the tax rate to 7 percent.
Fallin said her staff is reviewing Fent’s latest lawsuit.
“We’re confident the Supreme Court will uphold the legislation,” she said.
Preston L. Doerflinger, secretary of finance, administration and information technology, noted the legal challenge is on legislative procedure and not the policy itself.
“We believe the procedure was proper but welcome the court’s interpretation. It’s a good, fair policy for oil and gas producers and for state government, so we fully expect it to be the law going forward, whether through this bill or another,” he said.
The state’s oil and natural gas trade associations supported the legislation even though they initially wanted the lower rate to stay in place for four years instead of the three-year period established by the law. The groups said Thursday they think the legislation was completed properly.
“We feel like it was constitutional when it passed,” said Chad Warmington, president of the Oklahoma Oil and Gas Association. “The bill’s primary intent was not to be a revenue-raising measure. It was about dealing with an expiring incentive, not about raising revenue.”
While the law’s 2 percent rate does not go into effect until the middle of next year, industry leaders have said it is important for the tax and incentive rates to be established before companies decide how much they will spend on their upcoming drilling programs.
“House Bill 2562 gives Oklahoma oil and natural gas producers tax certainty as they plan their drilling budgets for 2015 and after,” Mike Terry, president of the Oklahoma Independent Petroleum Association said in a statement. “A prolonged legal battle or revisiting this subject during the 2015 legislative session puts that certainty in jeopardy. With that said, because the bill does not change the permanent gross production tax rate of 7 percent, we are confident Oklahoma lawmakers who supported the oil and natural gas industry acted within the guidelines of the state constitution.”
Fent also is suing the state 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.
Energy Editor Adam Wilmoth