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High prices could trigger tax hike on North Dakota oil industry

The prospect has prompted the oil industry and some North Dakota leaders to criticize the tax requirement in recent weeks, as many advocates have responded to U.S. sanctions on Russian output with calls for a friendlier environment for domestic production.

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An oil pumping station is part of a badlands landscape as seen Tuesday, July 6, 2010, in western North Dakota. File photo. John M. Steiner / Forum News Service
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BISMARCK — With U.S. crude prices hovering at some of their highest levels since the shale boom that put the Bakken on the map, North Dakota is on pace to reach a threshold that would increase taxes on its oil producers.

March marked the first month since 2014 in which oil prices averaged over $95 a barrel. If the price of West Texas Intermediate crude, the U.S. benchmark, clears that bar for two more consecutive months, a trigger established by North Dakota lawmakers in 2015 will kick in, hiking taxes on Bakken oil producers from 10% to 11%.

That prospect has prompted the oil industry and some North Dakota leaders to criticize the tax requirement in recent weeks, as many industry advocates have responded to U.S. sanctions on Russian oil with calls for a friendlier environment for domestic oil production.

Bumping taxes on producers is the opposite of what government should be doing in the current constrained oil market, Gov. Doug Burgum argued at a recent Industrial Commission meeting. He noted that the trigger amounts to a 10% hike on the North Dakota oil industry's current tax level.

“I can’t imagine a worse thing for our state to do than to raise taxes by 10% at a time when we’re already losing the battle for capital investment,” the second-term Republican said. “There has to be a discussion with the Legislature on that. I don’t think ‘do nothing’ is an option.”

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Lawmakers established the oil price trigger in 2015 as part of broader tax reforms that eliminated a more complex system of price incentives. In exchange for lowering the overall tax on drillers from 11.5% to 10%, lawmakers set a trigger price that would elevate taxes on the industry if prices averaged above $90 a barrel for three straight months. The trigger price is adjusted annually and today sits just under $95 a barrel.

Once activated, the trigger requires three more consecutive months below the threshold price to turn off.

North Dakota Petroleum Council President Ron Ness said he wants to see the Legislature address the trigger in its 2023 session, arguing that it creates a deterrent to production during times of high prices and contributes to a less predictable environment for the industry. The exact ramifications of a tax hike would vary from producer to producer, depending on how they structure their long term plans and hedge the price of oil, but it only adds to current headwinds for scaling up North Dakota's oil output, he said.

"The Bakken is in a very competitive situation right now," he said. "The country and the world want more oil production, and you don't get more by taxing it more."

Ness also noted that the reforms made in 2015 have raised taxes on the industry during periods of low prices. Under the old tax structure, taxes on crude producers dropped if prices fell below a five-month average of $55 a barrel, a system that would have resulted in much lower taxes on industry for much of 2020.

A recent analysis compiled by Legislative Council found that a 1% higher tax rate on oil producers would have carried a substantial windfall for the current two year budget cycle, swelling state oil revenues from $3.72 billion to $4.09 billion between 2021 and 2023 had the trigger been active that whole time.

While that estimate gives a general picture of the potential effects of the trigger for state revenues, Legislative Council senior financial analyst Adam Mathiak noted that it doesn't account for a host of factors, among them the consequences of the tax change to industry behavior.

U.S. crude prices were hovering just above $100 per barrel on Thursday afternoon, March, 31, and reached over $120 a barrel earlier in the month. A budget forecast created by lawmakers last year was based off prices half of today's level.

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Senate Majority Leader Rich Wardner, R-Dickinson, said that while he’s open to critiques of the policy, he would be hesitant about removing the trigger because it was part of an agreement that lawmakers reached with the industry to lower the overall taxes levied on their producers.

“A deal is a deal,” the majority leader said. If he hadn’t been there when the compromise with the industry was brokered in 2015, Wardner said he would likely be more sympathetic to calls to do away with the trigger. But he said he wants to hear more about the consequences of the trigger to production in the state, and if the possibility of its activation is hampering development.

House Majority Leader Chet Pollert, R-Carrington, on the other hand, said he thinks the trigger should be eliminated and replaced by a more predictable flat tax. The policy creates a disincentive for the industry to produce when prices are high, and many of the state funds that benefit from the oil extraction tax are already flush, Pollert said.

Both Pollert and Wardner have announced plans to retire after their terms end and wouldn't be around for possible action on the trigger in the 2023 legislative session.

Burgum did not say during the Industrial Commission meeting whether he thinks sustained high oil prices in the coming months could warrant bringing lawmakers back to Bismarck sooner than 2023.

Governor’s spokesman Mike Kennedy said in a statement that Burgum is always assessing how to respond to the challenges facing the state. Some circumstances, like last year's redistricting process and the disbursement of federal COVID-19 relief money, necessitate calling lawmakers in for a special session.

“We will continue to evaluate if a special session is needed based on the challenges of this year and discuss with legislative leaders as needed,” he said.

Readers can reach Forum reporter Adam Willis, a Report for America corps member, at awillis@forumcomm.com.

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