North Dakota lawmakers are considering a bill to reduce the state’s oil and gas tax and eliminate tax breaks that are pegged to the price of oil. Supporters say a fixed tax rate will create more financial stability. They also say that a lower tax rate will lead to more oil and gas development. But as Emily Guerin reports, it’s unclear whether that claim is true.
GUERIN: On Monday morning, Senate Majority Leader Rich Wardner laid out the reasons he wants to cut North Dakota’s oil and gas tax from 11 and a half to nine and a half percent.
RICH WARDNER: What is the reason for this bill? It’s stability.
GUERIN: Under current law, the oil tax rate drops by half when prices average $55 per barrel or less for 5 consecutive months. It’s looking like the so-called “big trigger” will go into effect on June 1st. That will cost the state $76 million a month -- something everyone wants to avoid. Supporters like Wardner also say lower taxes will encourage more oil and gas development in the state -- especially when prices are low.
WARDNER: As the price of oil came down they started stacking the rigs much sooner than they would’ve had it been a flat 9.5% rate.
GUERIN: In other words, if North Dakota had had a lower tax rate, companies would have stuck around longer when the price of oil started to fall. Barry Rabe is a professor of environmental policy at University of Michigan who studies oil and gas taxes. He says this argument just isn’t true.
BARRY RABE: There’s not a lot of evidence to suggest, empirically, that drilling investment follows tax rates, especially when we’re talking about a few percentage points, and yet that still comes up in the minds of a lot of legislators when they’re thinking about how to best cultivate a resource.
GUERIN: Rabe says things like infrastructure, distance to market and workforce are more important factors than taxes. Ron Ness of the North Dakota Petroleum Council says ultimately, the decision whether to drill or not depends on one thing: the price of oil. Still, he says having a predictable tax rate helps.
NESS: If you can at least plug into my formula a fair and competitive tax rate, I think it creates a much better business climate.
GUERIN: The proposed flat oil tax rate may or may not jumpstart oil and gas activity. And it’s still unclear whether it will save the state money in the long term -- legislators only estimated the financial impact for the next two years. What remains is stability, for the industry and for the state budget. Senators decide today whether or not to pass the bill.