The state historically has assessed a 7 percent tax on most production, but an incentive designed to stimulate horizontal drilling cut the tax to 1 percent for the first four years of production from horizontal wells. The current tax credit is set to expire in 2015, at which time the tax rate would return to 7 percent if no action is taken.
When the tax program was initiated, horizontal drilling was relatively rare. Today, however, 155 of the 172 rigs drilling for oil and natural gas in Oklahoma are involved in horizontal drilling, according to the most recent numbers from Baker Hughes.
Industry leaders have said the tax credit should be extended because it has been successful and led to increased drilling.
Others, however, say the tax credit has served its purpose and is no longer necessary.
Oklahoma Policy Institute Director David Blatt has been one of the more outspoken critics of the lower tax rate. He praised the report for showing the importance of the oil and gas industry in Oklahoma, but he said it did not change his mind about the tax credits.
“Where the report falls short is in making the case that the current tax breaks that we have are either necessary or affordable,” he said.
Blatt pointed out that as horizontal drilling has become common, the tax credit has grown substantially.
“Every school district when it says ‘Where has our funding gone?' can say it's gone into the pockets of horizontal drillers,” Blatt said. “Every prison guard who hasn't been able to get a raise can point to the same thing.”
Industry leaders, however, said the lower gross production tax rate has increased drilling, which has led to more jobs, more income tax and sales tax collections.
“If you want less of something, tax it more,” said Chad Warmington, president of the Oklahoma Oil and Gas Association, who pointed to Alaska, which increased taxes and has not seen as much oil and natural gas activity in recent years.
Mike Terry, president of the Oklahoma Independent Petroleum Association, said large companies that could drill anywhere choose their target areas based both on geology and on state tax systems.
Smaller companies, he said invest what they can in drilling. Lower tax rates lead to more money available for drilling, he said.
“Why, when things are going so well according to this study, would anyone want to mess with it?” Terry said.