High prices could trigger a tax hike on North Dakota’s oil industry – InForum

BISMARCK — With U.S. crude prices hovering at some of their highest levels since the shale boom that put the Bakken on the map, North Dakota is poised to hit a threshold that would raise taxes on its oil producers.

March marked

the first month since 2014

where oil prices averaged over $95 a barrel. If the price of West Texas Intermediate crude, the US benchmark, breaks that mark for two more consecutive months, a trigger established by North Dakota lawmakers in 2015 will trigger, raising taxes on Bakken oil producers by 10% at 11%.

That prospect has prompted the oil industry and some North Dakota leaders to criticize the tax demand in recent weeks, as many industry advocates have responded to U.S. sanctions on Russian oil by calling for a friendlier environment for domestic oil production.

Raising taxes on producers is the opposite of what the government should be doing in the currently constrained oil market, Gov. Doug Burgum said at a recent Industrial Commission meeting. He noted that the trigger was equivalent to a 10% increase in North Dakota’s current oil industry tax level.

“I can’t imagine a worse thing for our state than to raise taxes 10% at a time when we are already losing the battle for capital investment,” the second-term Republican said. “There needs to be a discussion with lawmakers about this. I don’t think “doing nothing” is an option.

Lawmakers established the oil price trigger in 2015 as part of broader tax reforms that eliminated a more complex system of price incentives. In exchange for reducing the overall tax on drillers from 11.5% to 10%, lawmakers set a trigger price that would raise taxes on the industry if prices averaged above $90 a barrel for three months. consecutive. The trigger price is adjusted annually and currently stands at just under $95 per barrel.

Once activated, the trigger still requires three consecutive months below the threshold price to deactivate.

North Dakota Petroleum Council Chairman Ron Ness said he wants to see the Legislature address the trigger in its 2023 session, arguing it creates a chilling effect on production during periods of high prices. and contributes to a less predictable environment for the industry. The exact ramifications of a tax hike would vary from producer to producer, depending on how they structure their long-term plans and cover the price of oil, but that only adds to the current headwinds to increase North Dakota’s oil production, he said.

“The Bakken are in a very competitive situation right now,” he said. “The country and the world want more oil production, and you don’t get more by taxing it more.”

Ness also noted that reforms made in 2015 increased taxes on the industry during periods of low prices. Under the old tax structure, taxes on crude producers fell if prices fell below a five-month average of $55 a barrel, a system that would have lowered taxes on the industry for much of 2020.

A recent analysis compiled by the Legislative Council found that a 1% higher tax rate on oil producers would have provided a substantial windfall for the current two-year budget cycle, pushing oil revenues from State of $3.72 billion to $4.09 billion between 2021 and 2023 if the trigger had been active all that time.

While this estimate paints a broad picture of the trigger’s potential effects on state revenue, Legislative Council senior financial analyst Adam Mathiak noted that it fails to take into account a host of factors, including which the consequences of the tax change on the behavior of the industry.

US crude prices were hovering just above $100 a barrel on Thursday afternoon, March 31, and hit over $120 a barrel earlier in the month.

A budget forecast

created by lawmakers last year was based on prices half of what they are today.

Senate Majority Leader Rich Wardner, R-Dickinson, said while he is open to criticism of the policy, he would be reluctant to remove the trigger because it was part of a deal lawmakers reached with industry to reduce overall taxes levied on their producers.

“A deal is a deal,” the Majority Leader said. Had he not been there when the compromise with industry was negotiated in 2015, Wardner said he would likely be more sympathetic to calls to remove the trigger. But he said he wanted to know more about the effects of the trigger on production in the state, and whether the possibility of its activation hinders development.

House Majority Leader Chet Pollert, R-Carrington, meanwhile said he believes the trigger should be eliminated and replaced with a more predictable flat tax. The policy creates a disincentive for industry to produce when prices are high, and many public funds that benefit from the oil extraction tax are already depleted, Pollert said.

Pollert and Wardner have both announced plans to retire after their terms end and would not be around for possible trigger action in the 2023 legislative session.

Burgum did not say at the Industrial Committee meeting whether he thinks high oil prices in the coming months might justify lawmakers returning to Bismarck before 2023.

Governor’s spokesman Mike Kennedy said in a statement that Burgum is still evaluating how to respond to the challenges facing the state. Certain circumstances, like last year’s redistricting process and the disbursement of federal COVID-19 relief money, require legislators to be summoned for a special session.

“We will continue to assess whether a special session is necessary based on this year’s challenges and engage with legislative leaders as necessary,” he said.

Readers can contact Forum reporter Adam Willis, a member of the Report for America corps, at [email protected]

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