OKLAHOMA CITY — Despite increasing public pressure, lawmakers are deeply divided over whether they should renege on promises made just a few years ago to the state’s biggest industry in a last-ditch effort to balance the state’s budget.

Critics say backpedaling now on the gross production tax rates lawmakers set in 2014 would make drillers think twice about investing billions in new capital and adding thousands of new oil jobs in Oklahoma. Closely tied to the cyclical energy industry, the state’s economic fortunes are only now starting to recover from the latest downturn.

Oil companies look closely at regulatory, political and tax climates before deciding where to drill, said Tim Wigley, president of the Oklahoma Independent Petroleum Association. The association represents over 2,500 companies and individuals from the state’s oil and natural gas industry.

“If things get too much out of whack with any of those, they take their investment elsewhere,” he said. “Now is the worst time in the world to tax your state’s top industry. Again, you are disincentivizing new drilling if you raise the tax.”

Supporters of hiking the taxes, however, say the obscenely low rates that lawmakers charge amount to little more than a cash giveaway to a mature industry that could easily afford to pay as high as 7 percent on new wells — even with depressed oil prices.

“We must face the stark reality that state government is bankrupt,” said former Tulsa mayor and producer Dewey Bartlett Jr. in a statement. “We are staring at a second-straight billion-dollar deficit in state funding. Our schools are in a funding crisis. Other state services are being decimated. 

“We believe the oil industry should stand up and agree that returning the oil and gas production tax to its historical level demonstrates our commitment to help solve this serious state budget crisis.”

Bartlett is a member of the newly formed Oklahoma Energy Producers Alliance, a group of small, privately owned producers. Bartlett’s group did not return messages left seeking comment.

“We don’t take it lightly that our industry, once the bulwark of the state economy and the state tax base, has been out here cutting special deals,” he said.

In an effort to incentivize drilling in 1994, Oklahoma lawmakers decided to charge the state’s drillers a 1 percent tax for 48 months on the oil removed from the beneath the state’s surface.

In 2014, lawmakers increased that to 2 percent for the first 36 months of well’s life. After 36 months, the tax rate jumps to 7 percent.

The state’s Tax Commission, though, notes that the majority of wells experience a 70 percent decline in output by second-year production, Republican state Treasurer Ken Miller wrote in his monthly economic report.

Miller said if the state had a 7 percent rate, collections through February in the budget year 2017 would have been almost $100 million more — if the volumes had remained unchanged.

“Principles of supply and demand suggest production would decline due to a higher tax rate’s impact on profit margins,” he wrote.

Even as oil prices dropped from more than $100 a barrel to as low as $26 and drillers shut down, Oklahoma’s low tax rate ensured that the state weathered the downturn better than most others, Wigley said.

A 2016 analysis by the State Chamber of Oklahoma’s Research Foundation found that while Oklahoma’s average production tax rate was below Louisiana and Texas, it was more than in Kansas, Colorado and Utah.

Raising the Oklahoma’s rate now could have dire consequences, said Donelle Harder, a vice president with the Oklahoma Oil and Gas Association, an energy trade association.

“What will happen is any new well — any new plans for new drilling — will get shifted to other states,” she said. “It’s very important that these legislators understand that changing the gross production tax has a long-term impact on the state.”

Paying state taxes of $2 billion in budget year 2015, the industry and its employees provided the largest single source of tax revenue, according to the State Chamber’s analysis.

In total, nearly 150,000 Oklahomans held employment in the state’s oil and gas sector, according to the analysis. Nearly 1 in 5 jobs were tied to the sector. In addition, the industry paid nearly $1.7 billion in royalties to Oklahomans.

Oklahoma ranked fifth among states in oil production and third in natural gas, and industry activity accounted for more than half of the Oklahoma’s fixed investment, according to the report.

Despite that, Wigley said Oklahoma politicians are looking for fast, easy solutions to fill the state’s $878 million shortfall.

“We contend this is not a fast, easy solution,” he said. “The fact that Democrats want to raise taxes on the oil and gas industry is a nice sound bite for them. It would be bad for Oklahomans.”

On Thursday, Democratic House Minority Leader Scott Inman, D-Del City, filed a measure that would immediately increase the state’s tax to 5 percent on all new wells.

He contends his measure would bring in $325 million in new revenue and have minimal impact on new drilling.

“(It) will give the Republican majority an opportunity to put their money where their mouth is and stand with their constituents and say, ‘Let’s find new revenues from gross production taxes,’” he said. “Or they can side with their big friends in the oil and gas companies and oppose that and instead look their public school children in the eye and say, ‘You can take more cuts.’”

House Speaker Charles McCall, R-Atoka, said some of his Republican caucus members think a tax hike is worthwhile to discuss. However, he said the Legislature would need 76 representatives to agree.

Meanwhile, Senate President Pro Tem Mike Schulz, R-Altus, said the idea is very controversial among his Republican colleagues. He’d need 36 senators to agree to a tax increase.

“We have members that certainly support it,” he said. “We have members of our caucus that oppose it. I do not think that this something that would pass out of our caucus right now.”

Janelle Stecklein covers the Oklahoma Statehouse for CNHI’s newspapers and websites. Reach her at jstecklein@cnhi.com.

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