Lawmakers likely will not alter several oil and gas drilling tax incentives that legislators extended earlier this year to 2012, the chairman of a legislative task force looking at tax credits said Wednesday.
“I don't see any (changes) at all in the oil and gas (credits),” Rep. David Dank said after Wednesday's hearing looking at incentives for the oil and gas industry.
The House of Representatives voted 85-12 and the Senate voted 40-0 to renew the credits earlier this year.
Dank, R-Oklahoma City, said other states with oil and gas reserves are offering similar incentives, and that Oklahoma could risk reducing oil and gas activity by reducing or eliminating benefits.
“With these incentives, we have created a climate by which they are not only going to drill 22,000-foot horizontal wells out there that could cost up to $14 million and could be a dry hole, but that also it creates a climate by which they're going to stay in Oklahoma and keep their employees here and keep their offices here,” he said. “I can't say enough good things about the oil and gas industry. It's our bedrock industry. If it were not for that industry, our economy would resemble that of a Third World nation.”
But Dank said he's hoping lawmakers next session will make adjustments to the home office tax credit for insurance companies by placing limits on it and making sure companies that receive it cannot get other state tax credits or incentives.
“Certainly we should not renege on any existing agreements, but we need to take a look at creating an endgame provision to establish a time limit on these tax credits,” said Dank, R-Oklahoma City.
Dank said he's concerned the program providing insurance premium tax credits for insurance companies that maintain home or regional offices in Oklahoma allows an insurance company to benefit from other state tax credits at the same time.
“We need to examine any loopholes to stop double-dipping in the future,” said Dank, chairman of the Task Force for the Study of State Tax Credits and Economic Incentives.
The Oklahoman reported earlier this month that one of the state's largest insurance companies received about $20 million in job creation rebates and tax credits in two separate economic development programs.
Farmers Insurance Co. Inc., which is based in Los Angeles, received $9.6 million in Quality Jobs rebate payments from 2002 to 2011, according to Oklahoma Tax Commission records, and claimed at least $8.8 million in “home office” tax credits against its insurance premium tax in the last decade, according to data from the Oklahoma Insurance Department. Those credits may be used if insurance companies establish headquarters or regional offices employing at least 200 people.
Oklahoma has a 2.25 percent tax on all insurance premiums written in the state, which totaled $172 million during the 2011 fiscal year that ended June 30.
Assistant Insurance Commissioner Rick Farmer told the task force that Farmers Insurance was allowed to receive benefits from both programs because the employees worked in two separate divisions. The legal interpretation approving the transactions was made in 2001, said Farmer, who joined the Insurance Department earlier this year.
Farmer said the Insurance Department is marketing the home office tax credit program to insurance companies to lure more firms to open regional offices in the state. About 15 insurance companies took part in the home office tax credit program during the last fiscal year.
“This has brought insurance companies to Oklahoma and we hope it brings more,” Farmer said.
More insurance companies having offices in Oklahoma would mean more policies being written in the state and should result in lower rates for consumers, he said.
During the session dealing with oil and gas tax credits and incentives, David Blatt, director of the Oklahoma Policy Institute, argued against the benefits.
A 2008 nonscientific survey by an Oklahoma City University economics professor showed state tax breaks ranked last among 10 variables cited by Oklahoma oil industry executives as affecting their decision to drill.
The state giving tax breaks regardless of the price of oil and gas — as it does with horizontal and deep-well drilling, but not other forms of production — can lead to suspicion that the state is subsidizing the normal cost of doing business for a powerful and well-connected industry instead of giving incentives for production, Blatt said.
Oklahoma has a 7 percent gross production tax on oil and gas, which this fiscal year is expected to bring in about $520 million into the state's general revenue fund, or about 8 percent of the state's $6.5 billion budget.
Tom Price, senior vice president of corporate development and government relations for Chesapeake Energy Corp., told task force members that natural gas producers pay the gross production tax on the amount of they receive at the well head, which is about $2.67 per thousand cubic feet, less than the market price of about $3.80 per thousand cubic feet.
Without the gross production tax exemption on horizontal and deep drilling wells, products would receive about 20 cents less per thousand cubic feet, Price said.
Several states have better incentives than Oklahoma, he said.
Chesapeake, which employs 6,500 in Oklahoma and 12,000 nationwide, is the most active operator in the United States with 176 active rigs in the country, Price said. Texas has 66 and Oklahoma has 34 rigs.
The tax incentive is not the sole factor for Chesapeake to decide where to drill, he said.
“There are a lot of variables that are involved in whether one drills in one state or another,” Price said. “The elimination of these incentives would change the economics relative to the investments that one would make. ... I can only tell you it would have an adverse impact.”