OKLAHOMA CITY — Despite a projected $170 million decline in revenue available for the Legislature to spend on schools, child welfare and other state programs, House Speaker T.W. Shannon wants an income tax cut and a permanent and generous oil and gas drilling tax incentive that is costing the state hundreds of millions of dollars each year.
The 2014 legislative session is still several weeks away, but the Republican speaker, preparing for his second session leading the increasingly conservative House, already has staked out firm positions despite his own caucus seeking increased spending for education and public safety.
Shannon also has said the House will not support a bond issue to pay for any capital improvements, including repairs to the crumbling state Capitol building, saying instead he supports a “pay-as-you-go” approach.
“We don’t need more government. We just don’t. We can live within our means,” Shannon said in a telephone interview with The Associated Press. “Any areas of growth, we should offset in some other area. It’s all about priorities.”
Discussions are ongoing among officials from the Senate, House and governor’s office with the oil and gas industry over the tax incentive for horizontal drilling that reduces the amount of tax from 7 percent to 1 percent for the first 48 months of production. The incentive, originally put in place in the late 1990s when horizontal drilling was experimental and costly, now applies to most new wells that are drilled because horizontal wells are now the norm.
Projections released last week from the Oklahoma Policy Institute, a Tulsa-based think tank, show the incentives are expected to cost the state close to $300 million annually over the next two fiscal years.
State finance officials don’t dispute the projections. Those estimates don’t include an additional $300 million the state is paying back over three years to the industry for the incentives that were suspended at the height of the state’s fiscal crisis in 2010.
The tax incentive is set to expire in 2015 and if no action is taken by the Legislature, the rate will go back up to 7 percent.
Gov. Mary Fallin has signaled she thinks the rate should be set somewhere between 1 percent and 7 percent, said Preston Doerflinger, Fallin’s secretary of finance and lead negotiator with the Legislature on the budget.
Shannon’s suggestion of making the 1 percent rate permanent is a “non-starter” for the governor, Doerflinger said.
“I would say she’s not interested in seeing it move back to 7 percent, either,” he added.
Doerflinger said oil and gas industry leaders also have signaled a willingness to negotiate a tax rate above 1 percent, and that discussions were taking place with industry leaders and himself, House Chief of Staff Rick Rose and Jonathan Nichols, the Senate’s chief advisor and legal counsel. Because those discussions were ongoing, Doerflinger said he and the governor were surprised when Shannon came out publicly and said he wanted to make the 1 percent rate permanent.
“I didn’t like the tone of the discussion,” Shannon said bluntly. “That’s why I weighed in on it. I didn’t like the idea that we have bureaucrats out there trying to find more ways to raise taxes on businesses in Oklahoma so that we can fund more government services.”
Senate President Pro Tem Brian Bingman said the Legislature has and will continue to be a supporter of the energy industry.
“At the same time, we do have responsibilities to educate our kids and make sure they’re prepared for the workforce and the demands that the oil and gas industry expects from people getting out of college,” said Bingman, an oil and gas company executive. “Our roads, our infrastructure, our capital needs are great.
“All that needs to be discussed, and we’ll see what happens.”
Oil and gas industry leaders were quick to endorse Shannon’s proposal.
“With increased drilling across the country, it is imperative Oklahoma remains competitive for investment dollars,” Oklahoma Independent Petroleum Association President Mike Terry said in a statement.
Blu Hulsey, vice president of governmental and regulatory affairs for Oklahoma City-based Continental Resources, said that while the company supports the speaker’s proposal, they also expect to continue negotiations with the governor and legislative leaders over the tax rate.
“We understand the process. We understand we’re just at the beginning,” Hulsey said. “We will always be willing to talk to the governor and legislative leaders ... and we understand that they’re all supportive of our industry.”
When the various tax incentives offered by the state are factored into the equation, Oklahoma’s effective tax rate on unconventional oil wells, like those that are drilled horizontally, is about 3.3 percent, according to an August study by Headwaters Economics, a Montana-based nonprofit research group. The study showed that Oklahoma’s rate was the lowest of seven peers, including Wyoming (11.7 percent), North Dakota (11.5 percent), Montana (7.5 percent), New Mexico (6.8 percent), Texas (6.7 percent), and Colorado (5.7 percent).
Shannon’s decision to stake out a position of making the 1 percent rate permanent clearly has rankled some legislators, who suggest Shannon seems to be putting politics ahead of good public policy.
“Whether it’s for a bigger, higher office or just the next election, most of the decisions made in the last couple of years have been made with politics in mind,” said House Democratic Leader Scott Inman, D-Del City. “If Republican leadership thinks that improving public schools and ensuring public safety is growing government, then I think they need to take a better look at what the role of state government is.”
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