Legislators talk oil taxes at Minot forum

Plans to restructure North Dakota’s oil taxes and distribution formulas would mean less revenue to the state long term but more money to oil country, including Minot.

Senate Majority Leader Rich Wardner, R-Dickinson, joined Minot legislators at a legislative forum Saturday to discuss oil taxes and legislation.

Wardner explained that the formula for distributing the state’s 5 percent production tax on oil would be revamped in House Bill 1358, introduced by Rep. Bob Skarphol, R-Tioga. Under HB 1358, the amount going back to political subdivisions would increase from $247 million to $520 million and townships and emergency services would share in the money with cities, counties and schools.

The bill includes a provision for hub cities and hub schools that would apply to Minot, Williston and Dickinson. These cities and schools would be funded separately through a different formula.

The first 1 percent of the gross value of the oil at the well and a fifth of the tax on gas would be deposited into a fund from which each hub city would receive $750,000 a year and each hub school district $250,000 a year for every 1 percent of its population privately employed in mining.

Wardner said the hub cities have indicated they need more than the bill proposes.

“So there’s some negotiation that will be going on over the next three months,” he said.

Senate Bill 2336, introduced by Sen. Dwight Cook, R-Mandan, and supported by Republican legislative leaders, would reduce the tax rates for oil extraction in the Bakken from 6.5 percent to 4.5 percent on wells drilled beginning in 2017. The tax on wells outside the Bakken would go to 2 percent.

North Dakota is at risk of unstable revenue swings now with its current tax rate and the multiple triggers and incentives that the bill would eliminate, Wardner said. One trigger is a tax holiday on horizontal drilling wells if the price of oil drops below about $53 a barrel.

“They are getting to the point where they have their wells drilled out in western North Dakota. If the price even goes down, not even to the trigger, it might be profitable for them to move their rigs out of the state and go someplace else,” Wardner said. “It almost happened in 2009, and if that happens, we will lose more than if we level off the tax and keep the industry going. It takes the uncertainty out of the oil industry, not only for the industry but also for the state.”

Just as important as keeping the oil taxes generated by rigs in the state is maintaining the corresponding sales taxes, he said. The Legislature anticipated a $51 million ending balance in July 2013, which now is expected to be $1.6 billion in large part due to sales taxes, he said.

Wardner added that the bill faces a heated debate in the Legislature.

“That one will be debated hard because the loyal opposition feels we are giving up money we shouldn’t. The (Republican) majority feels we don’t need to tax people to death, and the oil industry has been very good to us.”

Democratic House and Senate leaders have called SB 2336 “radical” and “reckless.”

“If there comes a time to cut taxes to keep North Dakota’s oil industry competitive, we will do so,” Senate Minority Leader Mac Schneider, D-Grand Forks, said at a news conference in Bismarck last week. “For now, the focus has to be on meeting the immediate needs of western North Dakota and seizing opportunities to ensure a strong state economy after the oil boom subsides.”

Changes in the extraction tax don’t affect political subdivisions because they get their money from the production tax. Wardner said some of that extraction tax is dedicated to funds for schools and water, along with a savings account known as the Legacy Fund.

“It’s going to affect those funds, but it’s down the road four years, and by then, we hope to have our infrastructure in place,” he said.

The bill also closes a loophole in the law relating to tax exemptions for stripper wells, which are low-producing wells. Legislators want to change the statute that allows high-producing wells in the same field as a stripper well to receive the same tax break.

Other legislation also has been introduced that addresses the stripper well loophole.

Democrats have objected to SB 2336 because while closing the loophole, it broadens the definition of a stripper well from production of 30 barrels or less a day to 45 barrels or less a day.

The fiscal impact of the bill in the next biennium is projected at a positive $28 million. Starting in 2017, the cut in the extraction tax is estimated to cost North Dakota $49.64 million, and by 2021, the extraction tax cut will amount to a $178 million annual reduction.

The Senate Finance and Taxation Committee will hear SB 2336 Tuesday.