Finances still tied to energy industry

THANKS to increasing diversification in Oklahoma’s economy, some officials believe the impact of falling oil prices won’t be as dire for state government finances as in the past. There’s some truth to that view, but officeholders should not kid themselves that the price of oil is no longer a key indicator of budget health for Oklahoma government.

It’s true that government is less dependent on oil and gas prices than in the past. State Treasurer Ken Miller says roughly 30 percent of the state’s general revenue fund came from gross production taxes in the 1980s. When he was a member of the Legislature from 2004 to 2010, that figure had fallen to around 15 percent. Today, he says gross production taxes account for about 5 percent of general revenue fund collections.

That indicates Oklahoma government is less reliant on oil and gas production, but it doesn’t mean finances won’t be hobbled by an oil bust, as recent experience demonstrates. This is because energy production impacts most tax revenue streams, not just the gross production tax.

A report released in 2014 by the State Chamber Research Foundation found the energy industry was the single largest contributor to state revenues at that time, accounting for roughly 22 percent of all state tax collections. A separate 2016 report from the foundation explained why the industry’s impact is so farreaching. The report stated, “Each new direct oil and gas job supports slightly more than two additional jobs statewide, a reflection of the relatively large employment multiplier (3.18) for the energy sector.” It’s estimated the oil and natural gas industry pays $4 in taxes per employee, compared with $1 in taxes per employee for most other industries.

Thus, when the energy downturn that began in 2014 cost Oklahoma more than 10,000 high-paying energy jobs, state Tax Commission reports showed reported taxable income plummeted more than $13 billion from 2014 to 2015 alone.

A chart showing Oklahoma government’s 12-month gross receipt tax collections and oil-and-gas employment levels demonstrates that the two have tracked one another in unison for the past decade. When the number of oil jobs increases, so do state tax collections. And when layoffs occur in the oil field, tax collections plummet.

In the long term, the connection between state government finances and oilfield employment should lessen. This is due to the growth of other industries and the fact that many energy jobs that disappeared in the recent recession are unlikely to return. Producers are more efficient than they were just five years ago. This means there will be fewer high-paying energy jobs in Oklahoma, but also fewer high-paying jobs lost in a downturn.

Even so, Oklahomans have reason to hope oil prices and energy employment remain stable, and reason to worry about recent developments. Oil prices have dropped in recent weeks, and gross production taxes (which were hiked substantially in recent years) are coming in below the estimates used by state budget writers.

Oklahoma policymakers need to pay attention to those trends. Because if oil prices continue to decline, state government’s recent past may turn into prologue.