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ND oil industry wants end to price-based tax triggers

April 27, 2022 GMT

BISMARCK, N.D. (AP) — North Dakota’s oil industry wants lawmakers to change the framework for taxing crude production that abolishes the price-based triggers that have been in place for decades.

Unless oil prices suddenly decline, North Dakota’s treasury may start reaping the benefits of a tax increase on drillers that could bump state tax collections by tens of millions of dollars in the current two-year budget cycle. The present situation with high crude prices is in contrast to just a few years ago when low oil prices threatened to trigger a tax break for drillers that would have cost the state lost revenue.

Abolishing oil-tax triggers gives drillers certainty and keeps the industry’s jobs and revenue flowing, said Ron Ness, president of the North Dakota Petroleum Council, a group that represents several hundred companies working in the state’s oil patch.

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Companies could leave North Dakota, the nation’s No. 3 oil producer, and focus drilling in other states that have a better and more certain tax climate, he said.

“Taxing oil more gets you less,” said Ness, who wants a flat tax on oil production.

“The roller coaster prices we’ve seen really mean that we need to be concerned about keeping investment (in North Dakota), “ Ness said. “Predictability where possible is key.”

The potential for an oil tax increase is possible because of a state law that adjusts North Dakota’s oil extraction tax, depending on whether the three-month average price of a barrel of oil is above or below a specified “trigger” price. Legislators first endorsed the concept in the mid-1980s, during a time of depressed oil prices.

North Dakota has two primary taxes on oil production — a production tax and an extraction tax, the latter of which was part of an initiated measure voters approved in November 1980.

The prospect of big tax cuts on the industry due to depressed oil prices had North Dakota lawmakers scrambling in the 2015 session to modify the tax framework. Had oil prices slipped below a five-month average of $55.09, the state stood to lose hundreds of millions of dollars.

The resulting legislation was among the most contentious of the session and passed just a few days before lawmakers adjourned. GOP lawmakers said it would provide a more predictable tax policy. Democrats argued it was a giveaway to the oil industry and would ultimately cost the state billions of dollars in tax revenue.

The current trigger is part of that 2015 legislation that abolished some price-based incentives for the oil industry in exchange for a lower oil tax rate — from 11.5% to 10%. But the bill also raised the total oil tax to 11% if oil prices rise to $90 a barrel for three consecutive months.

The increased tax rate is erased if oil slips below the threshold.

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The monthly averages are figured using West Texas Intermediate prices, the U.S. benchmark set at Cushing, Oklahoma. The trigger price is now $94.69 a barrel. It is adjusted annually for inflation, using a price index for industrial commodities compiled by the U.S. Labor Department’s Bureau of Labor Statistics.

WTI crude was fetching about $100 a barrel Wednesday, and has been above the price trigger since Feb. 28. Oil prices have surged with Russia’s invasion of Ukraine.

The price-triggered tax increase would swell state tax collections by $372 million to $4.09 billion for the current 2021-23 budget cycle, according to a revenue analysis done last month by the Legislative Council, which is the research arm of the North Dakota Legislature.

The Legislature’s interim Government Finance Committee heard an update Wednesday from Tax Department on the potential impact of the oil extraction tax trigger.

Tax Commissioner Brian Kroshus said June is the earliest the trigger can take effect, and it will likely happen based on current oil prices.

Rep. Michael Howe, the committee chairman, said he doesn’t expect any proposed legislation coming from his panel, but suspects House and Senate taxation committees to debate price-triggers when the Legislature reconvenes in January.

Former Republican House Majority Leader Al Carlson has long advocated ditching the price-based triggers on oil production. Bills he sponsored in 2015 and 2017 passed the House but were killed in the Senate.

“I did everything I could to get rid of it,” he said. “It’s terrible tax policy.”

Carlson said the Legislature must look at the long game, and that there are no guarantees companies will keep drilling in North Dakota if the new triggers take effect.

“Businesses need a predictable tax environment to expand, or they will go somewhere else instead and won’t come back,” he said.

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This version corrects the spelling of Brian Kroshus’ first name.