North Dakota Considers Last Minute 30 Percent Tax Cut

By John Celock

North Dakota lawmakers are being asked to consider a 30 percent cut in the state’s oil extraction tax released in the waning days of the state’s legislation session.

The state House Finance and Taxation Committee heard testimony about cutting the state’s oil extraction tax from 6.5 percent to 4.5 percent and making it an across the board flat tax Monday, three days after GOP leaders first presented the plan. Republican leaders say the plan is a tax hike since it would end a trigger in the state’s extraction tax law that reduces the tax if oil prices fall below a set per barrel rate for the period of the price decline. Democrats argue that the plan would cost the state over half a billion dollars in revenue and should not be rushed through the Legislature.

“It was once explained to me that our tax policy is kind of like being on the ‘Wheel of Fortune’ and spinning the pinwheel because sometimes you can hit the big trip to Hawaii and the next slot could be bankruptcy,” House Majority Leader Al Carlson (R-Fargo), the tax plan’s sponsor, told about the bill over the weekend.

The state’s oil extraction tax is set at 6.5 percent but drops to one percent in the event that the average price of oil drops below $55 a barrel. Republicans argue that the plan would provide more predictability since it would have a flat tax set no matter what the cost of oil is. During the meeting Monday morning supporters argued that the bill would provide stability in the economy of the oil rich state.

Opponents though argue that the bill would cause long-term harm since it could potentially cost the state $642 million in revenue.

“The heart of my concern with this bill is the permanent nature of the 30% cut to the extraction tax and the stunning loss of revenue that the people of this state could see if this reduction becomes effective,” state Senate Minority Leader Mac Schneider (D-Grand Forks) said in prepared testimony to the tax panel Monday. “For the sake of perspective, North Dakota collected about $2.14 billion in oil extraction tax revenue during the last (2011-2013) biennium. A 30% reduction of this amount is roughly $642 million. I think we can all agree that would have been a rather staggering loss of revenue for the state in a two year period.”

Schneider argued that while the state was in line to lose funds with the automatic trigger taking effect in June, the revenues would bounce back.

“While the lost extraction tax revenue during this 11 month period would be significant — $863 million, according to the Legislative Council — it is temporary. On the other hand, a 30% cut to the extraction tax — which, again, would have resulted in $642 million in lost revenue in only two years — is perpetual,” Schneider said in his testimony. “By any fair measure, the cost of the extraction tax reduction over the life of the Bakken would absolutely dwarf the temporary loss of revenue Moody’s and Legislative Council predict will occur if the trigger incentive becomes effective. In fact, the loss of revenue is incomparable.”

The timing of the bill has come under criticism from Democrats. Carlson said that the topic has been discussed for a while and should not come as a surprise. Opponents though said that legislative Democrats and others were not consulted before Carlson introduced the bill.
North Dakota’s bill filing deadline had already passed but Carlson was able to have the bill approved by the Delayed Bills Committee, which he chairs, in order to have it start late in the session. The Delayed Bills Committee is normally used to handle bills dealing with a natural disaster or a state program that needs legislation passed after the bill introduction deadline.

“This was not being asked for the oil industry or asked from the three affiliated tribes that hold land,” state House Democratic Caucus Co-Leader Ben Hanson (D-Fargo) told The Celock Report. “It is coming in last minute and have a significant effect on state revenues in the last 10 days of session. No one heard about this until last Friday.”

A third of North Dakota’s oil patch sits on Native American owned land and the tribes have an agreement in place with the state government related to taxing. Under the agreement, the tribal governments do not tax the oil revenue in order to promote the industry. Hanson said a change in the state’s tax code could cause a domino effect that leads to the canceling of the agreement and a tribal tax on oil as well.

Hanson said the timing of the bill concerns him, noting that large-scale revenue bills should not come this late in the legislative session. He said that he could see a special session having to be called to deal with the state budget resulting from the cuts.

“There are no plans to raise anything anywhere else. What is truly irresponsible is that if you like this idea you need to have to do this at the beginning of the session,” Hanson said. “If we pass this you have to have a whole new session in order to adjust the budgets. Our budgets are based on a 6.5 percent extraction rate and a 5 percent extraction rate. If you cut one by 30 percent you have to redo all of those budgets.”

Hanson believes that the GOP majority will likely pass the bill. He said one of the concerns with the bill being rushed through the Legislature he is concerned not only about the fiscal impact but the process as well. He noted that Schneider was cut off during his testimony to the tax panel Monday morning with questions, which he said is not the normal procedure.

He also questioned if the Republicans were trying to hide something.

“It is one of the most major pieces of legislation the session will see,” Hanson said. “It was clearly a hit job. It was done as quickly and quietly as possible to not let people know about this. North Dakotans are opposed to this.”