Port: Thanks to Republican leadership in Bismarck, falling oil prices aren't going to trigger a budget crisis
Let's be thankful the Democratic-NPL didn't get their way on oil tax policy.
MINOT, N.D. — Tying a tax rate to something as hugely volatile as oil prices is stupid public policy. Especially for a state like North Dakota which, at times, can count one out of every two dollars flowing into the state treasury as coming from taxes on oil production and extraction.
And yet, for a long time, that's exactly what our oil tax code was. Low prices would trigger an elimination of the extraction tax, basically cutting the effective tax rate on oil activity in half.
I'm sure I don't need to point out to you readers the sort of headaches that created. Lawmakers were stuck wringing their hands over the price of oil, terrified that a price rout would blow a hole in their budget. This became a bigger problem as the oil boom drove up oil production and thus the amount of revenues oil taxes were generating for the state.
Which is why, in the 2015 legislative session, lawmakers changed things. They lowered the top rate from 11.5% to 10%, and changed the trigger. Instead of the extraction tax being eliminated at low oil prices, it goes up with high oil prices. The new trigger moves the extraction tax from 5% to 6% when oil prices are high.
This reform faced ferocious opposition from the Democratic minority in Bismarck. Our liberal friends, who are invested, ideologically, in disdain for the oil industry, spent multiple election cycles howling about this reform . They characterized it, dishonestly, as a tax cut for big oil, pointing only to the change in the top rate and not the elimination of the low-price trigger, even though at one point the oil industry had paid nearly $1 billion more in taxes than they would have under the old regime.
As recently as the 2019 legislative session , Democrats were still carping about this issue, and claiming, based on incomplete math, that the 2015 reforms had cost the state revenues.
We should be glad the Democrats didn't get their way.
Currently, oil companies have been paying the higher rate, because oil prices have been high, but as the Associated Press reports , falling prices may soon trigger the lower rate.
“Unless there is a significant geopolitical event or supply disruption of some sort, it will revert back,” Tax Commissioner Brian Kroshus, a Republican, told the AP.
But this isn't going to be a problem for the budget. Instead of the trigger cutting the oil tax rate in half, it will only go down from 11% to 10%. "Even without the extra revenue from the price trigger, North Dakota’s oil tax collections were already running well ahead of projections," the AP reports.
Which isn't to say that this area of our tax code couldn't use some more work. Why do we need the price trigger at all? All it brings to the table is revenue uncertainty.
It's time we found a middle ground between the high-price rate and the low-price rate.
Let's pin the combined oil and extraction rates at something like 10.5% and call it a day.
And be thankful, again, that Democrats and their short-sighted preferences for oil tax policy, driven by their cultivated and myopic hostilities toward one of our state's most important industries, weren't in charge of the legislature back in 2015.