Blaming oil and gas tax rate for budget shortfall is inaccurate, short-sighted

The 2016 budget shortfall that threatened funding for state schools and government services has certainly been a challenge for Oklahoma. However, the recent focus by the media and some at the state Capitol on blaming the tax rate paid by the oil and gas industry for the crisis is misplaced and inaccurate.

Oklahoma’s oil and gas industry pays a gross production tax (called a severance tax in some states) on all oil and gas produced in state. The industry worked with the Legislature to simplify the gross production tax code in 2014. Since the mid-1990s, horizontal wells, by far the most common type of well drilled since 2012, were taxed at 1 percent for the first 48 months of production and 7 percent for the remaining life of the well.

In 2014, due to the passage of House Bill 2562, that initial rate was increased to 2 percent for 36 months and then 7 percent afterward, effectively raising taxes on oil and gas production by 100 percent in the first 36 months and by 600 percent starting in the 37th month. Starting in July of 2015, all new production is being taxed at the higher rate, and these wells will continue to produce oil and gas for 20 years and be taxed at 7 percent.

The production tax changes in 2014 sunset a number of tax exemptions and created a permanent tax rate for all oil and gas activity. This has allowed Oklahoma to remain competitive with other producing states while providing certainty for the industry, even during this time of severely depressed prices.

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