Budget & Tax
Jonathan Small | May 12, 2014
Making the best of a bad situation
Policymakers face an important decision in the last few weeks of the legislative session.
For two decades, Oklahoma has had an appropriately low effective gross production tax rate, one percent, on horizontal and other risky and capital-intensive wells. This policy reflects policy in the sales tax code, income tax code, and other tax codes, recognizing that the process of manufacturing should not be burdened with taxes until after costs have been recovered. Historically the rate was statutorily required to be reauthorized every few years.
State law requires the current one percent rate on these new wells to expire on July 1, 2015, resulting in a tax increase of 600 percent to a rate of seven percent.
To prevent such a devastating event, a proposal has emerged to implement a permanent two-percent gross production tax rate on all new wells (regardless of the type of well drilled) during the first 48 months of production. The proposal also eliminates other drilling credits and improves accountability for the process for qualifying for the reduced rate.
Ideally, the rate should remain at one percent. Unfortunately, the current environment at the Capitol for the foreseeable future will not allow the rate to remain at one percent. Given that reality, this 2-percent proposal is economically sound, permanent, and simple. In short, this proposal makes the best of an unfortunate situation.
Oklahoma is in fierce competition with surrounding states and the rest of the nation for entrepreneurs and the jobs they generate. Oil and gas mining and related activities are directly impacted by gross production taxes, particularly where the geologic conditions are not as ideal as in other states as is the case for Oklahoma. Technological advances in oil and gas mining, the mobility and ease of generation of capital from anywhere, and the demands of those who put capital at risk make it imperative for Oklahoma to have the most attractive climate possible. Given this, lawmakers cannot afford to play with fire when it comes to determining an appropriate gross-production tax. The status quo ends in a devastating tax increase. Given the demonstrable appetite of government, an agreed-to rate only settles higher the longer policymakers wait.
For those who support free markets and the lowest, broadest taxes possible that don’t destroy the manufacturing and production process -- for those who want to protect an industry advantage Oklahoma has over other states and preserve economic opportunity for all Oklahomans -- the proposal by titans of job creation to set a flat rate of two percent is the best available option. - See more at: http://www.ocpathink.org/articles/2712#sthash.M5TdAgjt.dpuf
Jonathan Small, C.P.A., serves as President and joined the staff in December of 2010. Previously, Jonathan served as a budget analyst for the Oklahoma Office of State Finance, as a fiscal policy analyst and research analyst for the Oklahoma House of Representatives, and as director of government affairs for the Oklahoma Insurance Department. Small’s work includes co-authoring “Economics 101” with Dr. Arthur Laffer and Dr. Wayne Winegarden, and his policy expertise has been referenced by The Oklahoman, the Tulsa World, National Review, the L.A. Times, The Hill, the Wall Street Journal and the Huffington Post. His weekly column “Free Market Friday” is published by the Journal Record and syndicated in 27 markets. A recipient of the American Legislative Exchange Council’s prestigious Private Sector Member of the Year award, Small is nationally recognized for his work to promote free markets, limited government and innovative public policy reforms. Jonathan holds a B.A. in Accounting from the University of Central Oklahoma and is a Certified Public Accountant.