Budget & Tax
With an eye on commodity prices, policymakers look for ‘stability through savings’
April 5, 2019
A crash in oil prices from 2014 to 2016 also cratered Oklahoma government revenues. That scenario could repeat should oil prices experience a similar decline again, based on a new report, a finding with much significance as Gov. Kevin Stitt and lawmakers debate whether and how much to increase state savings for future downturns.
A study from the State Chamber Research Foundation, “Oklahoma Oil & Gas Activity & Tax Contribution,” examined the impact of falling oil prices on the state economy and associated tax collections from the third quarter of 2014 to the fourth quarter of 2016. The report found that falling oil prices produced “a steady, cumulative decline of $1.5 billion (15.4 percent) in total state tax revenue,” but that the gap was even greater between collections and forecasts – a shortfall of $2.25 billion, or 23.7 percent.
The impact of falling oil prices was seen in direct employment figures for the industry, which shed 21,500 jobs. Earnings by oil and gas workers and self-employed proprietors declined by $8.9 billion, according to the report, and GDP in Oklahoma’s oil and gas sector declined by $22.1 billion.
But the ripple effects were felt by people far beyond those working directly in the oil patch. The report found Oklahoma lost a total of 69,800 jobs during the downturn, with household earnings declining by $30.9 billion and state GDP contracting by $51.8 billion “from peak to trough based on counterfactual forecasts in place prior to the downturn.”
Thus, the report found that a $1 billion reduction in oil and gas industry GDP equates to an average reduction of $102 million in total state tax revenue.
Even if higher rates had been in place for virtually all state taxes before the oil bust, the report indicates Oklahoma government would have still experienced a major decline in revenue. Falling oil prices not only drove collections lower for revenue derived from direct taxation on oil production, but also impacted “multiple tax streams beyond severance taxes,” including personal and corporate income tax, sales and use tax, motor vehicle, motor fuel, and more.
The report’s findings suggest Oklahoma government could face a similar – or even worse – budget scenario should oil prices again decline in the near future, because lawmakers’ response to the last downturn included significant increases in direct taxation of oil production.
Gov. Kevin Stitt noted this problem in his State of the State address in February, warning legislators, “We must be honest with ourselves and recognize that last year’s tax increases made us more dependent on the price of oil. We must be good fiscal stewards of this decision by creating more stability through savings.”
House Appropriations and Budget Chairman Kevin Wallace, R-Wellston, said there is no doubt that Oklahoma is “a commodity-driven state” and lawmakers are aware state finances become less stable as reliance on wildly swinging commodity prices increases.
In 2016, he noted just 1.8 percent of money in the state’s general revenue fund came from gross production tax on energy production. By next year, gross production taxes are expected to represent up to 11 percent of general revenue.
Wallace said lawmakers “all know” the state budget depends heavily “on an unstable commodity.”
Sen. Roger Thompson, R-Okemah and chair of the Senate Appropriations Committee, also said legislators have no illusions.
“We are definitely an oil and gas state.”
Thompson noted last year’s state budget was written based on a projected average price of $54.84 per barrel, and this year’s budget will be based on an average price of $54.23. But when Thompson talks to officials at some of Oklahoma’s largest energy companies, he said those officials are basing their company budgets on a price of around $50 per barrel.
“I want to make sure that we don’t overspend the money, so whenever I begin to see the difference in whatever the industry is actually budgeting per barrel and then what we’re budgeting per barrel, I pay attention to that,” Thompson said.
Wallace said House officials also follow energy trends closely.
“We’re always looking at oil and gas because it is such a driver.”
To avoid a repeat of the budget chaos of the last several years, Stitt has called for increasing the amount of money Oklahoma government holds in reserve. He wants to save $200 million of this year’s surplus. That figure, combined with an expected $359.7 million deposit that will go into the state's Rainy Day Fund later this year, would bring state savings up to more than $1 billion.
Long term, Stitt says Oklahoma needs to have $2 billion in savings to provide stability during downturns.
House Republicans have voiced support for setting money aside, but not as much as Stitt is seeking. They’ve previously suggested about $50 million of this year’s surplus should be held in reserve. Even so, Wallace said, “The conversation is about savings.”
Wallace also noted the Revenue Stabilization Fund, created in 2016, is expected to receive a deposit of about $463 million later this year. Money deposited into that fund comes from any gross production and corporate income tax collections that exceed a five-year average. A House spokesman said money in the Revenue Stabilization Fund is in addition to funds going to the state’s Rainy Day fund.
Thompson said the Senate agrees with Stitt’s call to set aside money from this year’s surplus, but also said some spending increases are needed.
“I believe we ought to save money,” Thompson said. “Our first priority, though, is to take care of the needs of the people of the state of Oklahoma.”
He said his priorities include raising nursing home payments, restoring the Health Department after last year’s financial problems led to massive layoffs, and funding the state’s teaching hospital programs.
As the minority party, Democrats’ role in the budget debate will be limited, but they appear unlikely to support any effort to boost savings. House Democratic leadership has dismissed calls to place any of this year’s surplus aside and called for instead approving additional tax increases. Their agenda is focused on boosting spending, particularly in education and health care.
Against the backdrop of this debate, North Dakota offers a stark contrast with Oklahoma as an energy state that taken a different approach to budgeting and savings. In 2010, voters in that state approved the creation of a Legacy Fund that holds 30 percent of oil and gas tax revenue collections. A temporary “lockout” provision in the state constitution prevented North Dakota lawmakers from spending the principal and earnings until mid-2017. By March 31, 2018, the North Dakota Legacy Fund held $5.3 billion. That total represented $4.3 billion in principal and more than $1 billion in earnings.
The left-leaning Center on Budget and Policy Priorities, which uses a methodology that declares many states have cut education spending even when raw spending totals increase, recently claimed Oklahoma’s state-local combined per-pupil spending on education, adjusted for inflation, declined 13 percent from 2008 to 2016. In contrast, the center found oil-dependent North Dakota’s per-pupil spending increased 35 percent despite that state enduring the same oil bust that caused financial havoc in Oklahoma.
Thompson said the lessons of recent years have not been forgotten.
“Yes, we’ve got a little bit more money,” he said, “but we’re not going to spend every dime.”