Budget & Tax , Energy
Jonathan Small & Dave Bond | May 19, 2014
Myths and facts: Is Oklahoma’s one-percent tax on horizontal drilling a subsidy that created a state government budget shortfall? The answer is no
Jonathan Small & Dave Bond
[Advocates for raising Oklahoma’s gross production tax from the current 1 percent rate to 7 percent on horizontal and deep-well drilling for oil and natural gas have made questionable claims about the nature of the tax, the effects of energy drilling on Oklahoma’s economy, and the relationship between taxes on drilling and funding state government. This is one in a series of posts in which we present the facts.]
Myth: Oklahoma’s current gross production tax rate of 1 percent on horizontal and deep oil and natural gas wells is a “subsidy” for the energy industry that has caused a budget shortfall for state government.
Facts: As we’ve pointed out before, Oklahoma’s state government is not currently facing a budget shortfall. Tax collections and government spending are hitting record highs. It is true that, while gross production tax collections in Oklahoma are above prior years, deposits from gross production tax collections into the state’s general revenue fund — from which lawmakers appropriate — are down, according to reports from the state’s budget office and the state treasurer’s office.
To understand this disparity between collections and deposits, we must revisit the Great Recession, which began in 2009 and still shows effects on the U.S. economy today. During the recession, the U.S. government issued hundreds of billions of dollars in stimulus funds to state governments. Oklahoma received billions of dollars in federal stimulus funds. These funds allowed Oklahoma lawmakers to avoid making deeper spending reductions than might have otherwise been necessary. As a result, some spending efficiencies within state government were not pursued.
For example, reform of the process that provides health benefits for state government employees — which estimates indicate could save taxpayers a minimum of $95 million a year without reducing the quality of care state employees receive — was not implemented during the recession, nor has it been adopted since, despite numerous opportunities to do so.
However, Oklahoma lawmakers enjoyed an additional budgeting advantage during the recession that their counterparts in other states did not. In 2010, as previously noted, lawmakers changed how the gross production tax was applied to horizontal and deep wells. Instead of being a tax rebate that effectively lowered the rate from 7 percent to 1 percent, the gross production tax became a fixed, literal 1 percent rate on these types of wells. At the same time, representatives of Oklahoma’s energy industry agreed to defer tax rebate payments — that, by state statute, were owed to them from their horizontal and deep-well drilling activities during the recession years — until after the recession ended.
This allowed lawmakers to redirect the rebate dollars, using them to plug holes in the state budget during recession years in which tax collections were below previous record highs.
In effect, this functioned as an interest-free loan from Oklahoma’s private-sector job creators to Oklahoma lawmakers, enabling those writing the state government’s budget to avoid further reductions in spending — above and beyond what, thanks to federal stimulus dollars, they had already avoided.
As a result of these two simultaneous bailouts, Oklahoma lawmakers and the tax consumers to whom they appropriate have avoided trimming the full fat from state government and are now budgeting based on artificially inflated numbers from previous years. Yet there is still a clamor for more taxpayer money.
Meanwhile, a recent analysis by the Kansas Policy Institute ranked Oklahoma 18th out of all 50 states in estimated total state government spending per resident. In other words, as many as 17 other states appear to allocate taxpayer dollars more efficiently than Oklahoma. And we’re still taking tax money from Oklahoma families and giving it to golf courses and rodeos.
Jonathan Small, CPA, is OCPA’s vice president for policy. Dave Bond is CEO of OCPA Impact, Inc., an Oklahoma-focused, nonpartisan issue advocacy organization.
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.
Vice President for Advocacy
Dave Bond serves as Vice President for Advocacy at the Oklahoma Council of Public Affairs. He was previously the CEO of OCPA Impact, OCPA's 501(c)4 action partner. Since 2011, Dave has advocated at the Oklahoma Capitol on issues of free enterprise, individual initiative and limited government. He has been referred to in the Tulsa World as "a prominent Oklahoma anti-tax lobbyist". Prior to his advocacy efforts, Dave worked in Oklahoma elections, focused mostly on state legislative campaigns. He was the executive director of the Republican State House Committee, the campaign arm of the Republican caucus of the Oklahoma House of Representatives. Dave also worked with the campaign consulting firm A.H. Strategies and with the inaugural campaign of former Corporation Commissioner Jeff Cloud. In addition, he served in the media and communications divisions of the Oklahoma House of Representatives. Dave has lived in Oklahoma most of his life and is a graduate of Oklahoma State University. He and his wife Marsha have two sons and live in Yukon.