Updated May 15, 2017.
Calls to increase the state’s tax on oil and gas wells intensified Monday after Oklahoma lawmakers rejected one of the biggest revenue-raising bills of this year’s session.
A vote to raise the state’s cigarette tax by $1.50 per pack – and generate $215 million in new revenue – failed to clear the needed three-fourths majority in the House.
With time running out to pass revenue bills, this has increased pressure to find new ways to bridge the state’s $878 million shortfall or pass a gross production tax that would unlock Democrat votes to get the cigarette tax through.
But a debate of how the gross production tax would be applied is a key sticking point that has kept many Republicans from backing the plan. Specifically, the deadlock centers on whether a potential rate increase would apply to all wells or just new ones.
Currently, newly drilled wells are taxed at 2 percent for their first 36 months of production. They are then taxed at 7 percent for the rest of the life of the well.
Democrats want to raise the rate to 5 percent for the first 36 months – a period when wells produce the most oil and gas. And they want this to apply to existing wells that are paying the 2 percent rate and new wells.
Oklahoma Tax Commission projections show this would bring in an extra $148.7 million for the state in next year’s budget.
But many Republicans and much of the oil and gas industry oppose raising the gross production tax on existing wells, arguing that the wells were drilled on the assumption they would be subject to the 2 percent rate for the first 36 months.
In a letter to lawmakers, the Oklahoma Oil and Gas Association argued this is “bad business” because the state would be going back on its word by changing the rate for wells already in production.
“This would not only discourage future oil and natural gas development, but it would also discourage any businesses looking to open or relocate to the state,” the association wrote in the letter. “For a state to sign a legal document and then a few years later rip it up and change the game, after capital investments have been made, is irresponsible.”
The alternative – applying the tax only to wells drilled on or after July 1 – has few supporters in the Legislature because Tax Commission estimates show this would have only a $20.2 million impact on next year’s budget.
House Majority Floor Leader Jon Echols, R-Oklahoma City, said since this would only put a small dent in the state’s $878 million budget shortfall, it’s not worth making the change.
“I think our members are more interested in passing a budget than punishing oil and gas,” he said.
Echols said he also opposes increasing the rate on existing wells because it could be considered a constitutionally prohibited retroactive tax increase.
House Minority Leader Scott Inman, D-Del City, said this concern is unfounded.
“To make it retroactive would be go back in and say that any well that’s been paying 2 percent for the last two years, well we want you to pay what would’ve been five percent for the past two years and cut us a check,” he said. “That’s not the case.”
Despite the impasse, some are hopeful that Monday’s failed vote on the cigarette tax increase could boost momentum for getting a gross production tax increase though the Legislature.
That’s because the 63-34 vote (76 votes are required to pass the three-fourths threshold for revenue bills) showed that the full Democratic House caucus could swing the vote if they all voted for the bill.
Prior to the vote, it was unclear if enough Republicans could pass the bill along with a small number of Democrats who were expected to support it. But 20 Republicans, many of whom ran on anti-tax campaigns, voted against it.
Meanwhile, 14 of the 26-members House Democratic caucus were among the “no” votes on the bill – enough to pass the three-fourth threshold if they all changed their vote.
Inman has repeatedly said Democrats would deliver his full caucus on the cigarette return for Republicans passing the gross production tax.
Since the cigarette tax is a major component of both the Republican House and Senate budget plans, Inman said Republicans could be more motivated to come to the negotiating table.
“The House majority party and the Republicans in the Senate desperately need revenue and they need our votes to get there,” he said after Monday’s vote. “We think we are closer to a gross production tax agreement than we were just a few hours ago.”
Increasing gross production and cigarette taxes would cover up to 40 percent of the shortfall. With other proposals moving through the Legislature, this would increase the likelihood of lawmakers passing a budget without substantial cuts.
Leaders of both parties confirmed there have been “serious talks” surrounding the gross production tax with negotiations heating up in the past several days.
But Speaker Charles McCall, R-Atoka, repeated on Monday what his counterparts in the Senate said at the end of last week: There is no consensus among Republicans on whether to increase the rate or explore shortening the time period when wells are eligible for 2 percent incentive.
Meanwhile, Senate Republicans are pursing their own budget plan – one that doesn’t include changing gross production rates.
The chamber passed a $510 million bill Monday that includes the $1.50 cigarette tax, increasing the fuel tax by six cents per gallon, repealing gross production rebates, repealing the manufacturing sales tax exemption for the wind industry and changing how transportation funds are spent.
Highlighting the difficulties that lawmakers face, this package wouldn’t even fill 60 percent of the state’s budget shortfall. And House leaders all but declared the bill dead on arrival.
That’s because McCall said including the fuel tax increase is a “poison pill” that would ensure it’s defeat in the House. And like the earlier cigarette tax bill, this too would need Democratic votes to pass the three-fourths threshold – something Inman said his caucus would not deliver.
A House budget committee also forwarded a set of revenue-raising bills that could generate additional funds, including a new bill that would increase the cigarette tax by 67 cents per pack and raise $96 million.
That passed on a 16-9 vote and will likely face challenges with many Democrats vowing again to oppose the bill when it goes to the House floor.
And time is running out as May 19 is the deadline for the Legislature to pass revenue-raising bills. Still, McCall said he is confident that they will pass an acceptable budget regardless of whether a gross production tax increase is included or not.
“We will send revenue-raising measures to the Senate,” he said. “And the revenue raising measures we send will be sufficient to fill the budget hole and provide stable funding for core services for the state.”