Hamm: Legislature should not raise gross production tax rate
As the debate continues on how to fill the state’s $878 million budget hole, Continental Resources Inc. CEO Harold Hamm on Thursday warned that Legislators should avoid raising taxes on the state’s oil and natural gas industry.
“It would be a huge deterrent on activity in Oklahoma,” Hamm said in an interview after his company’s annual shareholder meeting Thursday morning. “To raise the gross production tax on the industry when prices are below $50 for oil and below $3 for natural gas, that’s unconscionable. That sends the wrong message. We can’t always go back to the trough of loading up on oil and gas every time the state needs revenue.”
Republicans in the Legislature so far have tried to address the shortfall with new taxes on cigarettes, gasoline and other goods and services. Democrats led by House Minority Leader Scott Inman have called the effort a regressive tax plan that would increase taxes on goods and services most disproportionately used by lower income Oklahomans while taxes on the oil and natural gas industry and the states’ income tax rate have declined in recent years.
The Legislature three years ago set the base gross production tax rate
We would love to be able to just roll up a bus — and have paid leave — to come up here and advocate on behalf of their services. State employees who do this have to take their own annual leave and leave their work site. You very well can’t do that at a prison, and DHS is so understaffed like a lot of agencies. They can’t absorb the caseload.”
Tom Dunning
at 2 percent for the first three years of production before it increases to 7 percent. Previously, the rate was 7 percent, but horizontal drilling — which represents the vast majority of current drilling — was taxed at 1 percent for the first four years as an incentive that was set to expire 2015.
As a result, industry leaders say the initial gross production tax rate doubled from 1 percent to 2 percent, while others say the rate was lowered from 7 percent to 2 percent.
Both are correct, depending on the perspective. But the cumulative result is that the overall effective gross production tax rate — which includes all production taxes and incentives — declined to 3.2 percent in fiscal year 2016 from 6.25 percent in 2012, according to the Oklahoma tax Commission.
Oil and natural gas industry leaders have said this is a terrible time to consider raising the gross production tax rate as the industry recovers from its deepest downturn in three decades.
“We just now returned to a small degree of profitability,” Hamm said. “To put more taxes on us puts us back in a hole. We need to look for other sources of revenue.”
Higher gross production taxes could cost the state jobs, he said.
“I think companies would move away if we get too aggressive,” Hamm said.
For Continental Resources, higher taxes could affect the company’s drilling plans. The gross production tax rate is one of the factors companies use to determine where and how to drill, Hamm said.
“It all goes into the calculation of economics,” he said. “Certainly it changes the economics.”
Instead of raising taxes on the oil and natural gas industry, Hamm pointed to his favorite target: Wind energy.
“We’ve had a 17-year giveaway to wind,” he said. “They’ve not paid anything, and we’ve paid them huge amounts. That finally caught up with Oklahoma. It broke the state and had to change. They should be taxed at the same rate we are before anything is done to raise our tax rate.”
Gov. Mary Fallin earlier this session signed House Bill 2298, which ends the zero-emissions tax credit for new wind projects July 1, a move the state tax commission said would save the state $60 million annually. The Legislature also is considering a plan to eliminate the manufacturer’s sales tax exemption for wind equipment, a plan the tax commission said would save the state $16 million a year.