April 17th, 2015 No Oil Tax Hikes - Short or Long Term Reforming the oil tax in North Dakota has been a recurring theme for the least three legislat

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April 17th, 2015


No Oil Tax Hikes - Short or Long Term


Reforming the oil tax in North Dakota has been a recurring theme for the least three legislative sessions since former Governor Ed Schafer tried to convince the legislature to remodel the complicated system of triggers, exemptions, deductions, holidays, averages, and other minutia.

Democrats have opposed every effort, and Republicans have had a hard time coming up with a plan that makes sense.

The best time to do something would have been when the state was flush with revenue and there weren't structural macro-economic problems in the oil industry.

The state's oil tax code does need to be simplified, and rates do need to be more consistent - but the political winds have never come together.

Now, as the 2015 legislative session enters the final stretch, a new plan is being proposed at the very last minute - and it doesn't seem to be destined for a better showing than previous attempts.

According to the Fargo Forum, the new plan would replace what is commonly referred to as "the big trigger".

North Dakota Republicans are proposing a late-session bill that would hedge against the loss of tax revenue from low oil prices by cutting oil taxes instead of allowing an exemption to take effect that could cost the state billions of dollars.

The “trigger on the trigger” would permanently reduce the state’s oil extraction tax from 6.5 percent to 4.5 percent if the so-called “large trigger” incentive kicks in June 1 as expected. The state’s 5 percent oil production tax wouldn’t be affected.

Senate Majority Leader Rich Wardner, R-Dickinson, said the oil industry has indicated it will “reluctantly” go along with the plan, even though it will mean higher taxes for them, at least in the short-term.

“What they’re going to get is stability,” he said during a Senate Republican caucus meeting this morning.

The actual bill is not posted yet, since it has to go through the Delayed Bills process.

According to the last and final predictions, the big trigger will kick in and suspend the 6.5% and stay suspended for 11 months, reducing the state's revenue by over $5 billion.

The 5% production tax always stays in place.

This new plan that is proposed as a delayed bill would have the 6.5% go to 4.5% instead of 0%, but stay there permanently if the big trigger is pulled.

Presumably, the complicated oil tax code that nobody really likes would be downsized or abolished in return for the rate cut.

As a long term policy, this is a good and needed step.

The problem is that oil companies, many of whom are in a lot of debt, are now counting on the big trigger to pull, and to get the full 6.5% holiday until oil prices recover. So for them, this latest plan actually represents a tax increase in the short-term.

Legislators are scrambling to find ways to replace revenue that will be lost if the big trigger gets triggered - but passing what amounts to roughly a $3 billion tax hike on the oil industry is not a good way to do it.


A better approach would be to do the following:

Leave the big trigger the way it is, if it gets pulled, let these reforms go into effect when the big trigger would otherwise get lifted.

If prices recover soon, and the big trigger doesn't get pulled, have the reforms go into effect at the start of the 2017-2019 budget cycle.

And while they are looking at long term reforms and flattening the oil tax, legislators should look at flattening the personal and corporate income taxes because everyone deserves to have lower and simpler taxes.


-Dustin Gawrylow, Managing Director

North Dakota Watchdog Network

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