Oklahoma Sets Oil Production Tax at 2 Percent

Gov. Mary Fallin signed legislation that will set the state's oil and natural gas gross production tax for the first 36 months of production. The rate had historically been 7 percent and was recently lowered to 4 percent.

By Adam Wilmoth

Gov. Mary Fallin on Wednesday signed legislation that will set the state's oil and natural gas gross production tax at 2 percent for the first 36 months of production.

The new tax rate will become effective July 1, 2015, when the existing tax program is set to expire.

"The energy industry is the leading driver of economic growth and job creation in Oklahoma," Fallin said. "Approximately one in four Oklahomans have a job and a salary because of our energy producers. They are part of the fabric of this state, and we rely on them, not just for continued growth and prosperity, but to support everything from our charity organizations to our sports teams."

Oklahoma Secretary of Finance, Administration and Information Technology Preston L. Doerflinger said HB 2562 was the result of successful talks between the oil and gas industry, legislative leaders and the governor.

"The compromise we reached adequately addresses the revenue issues caused by the previous policy while still supporting oil and gas producers," Doerflinger said. "It's a win-win result for energy producers and the state, and I'm proud that industry and government were able to collaborate and agree on a deal that serves everyone well."

The state historically has assessed a 7 percent tax. In 1994, the Legislature created an incentive for horizontal drilling. The incentive initially lowered the tax rate to 1 percent for the first two years or until costs were recovered. In 2002, the incentive was extended to up to four years.

The incentive program is set to expire next year, which would have returned the tax rate to 7 percent.

House Bill 2562 will set the tax rate the same for both horizontal and vertical wells.

"Oklahoma's energy industry is grateful for the leadership of Oklahoma's Senate and House members, as well as the governor, in developing principled legislation that preserves the economic well-being of the industry that built this state," Oklahoma Oil and Gas Association President Chad Warmington said.

Mike Terry, president of the Oklahoma Independent Petroleum Association, said the new tax rate will allow Oklahoma oil and natural gas companies to continue drilling wells in the state.

"There is competition every day to keep drilling dollars here in Oklahoma," Terry said. "Maintaining a competitive business climate is essential, and a tax structure in place that encourages producers large and small to increase development of oil and natural gas in Oklahoma is an important part of that equation."

Others, however, said the tax rate still is too low for too long. "We think this was an ill-advised giveaway to oil companies that is going to be at the expense of our ability to adequately fund critical public services," Oklahoma Policy Institute Director David Blatt said Wednesday. "There was clearly many in the Legislature who had strong doubts about this and acknowledged this was not the right thing to do, but the bill passed. It looks like it was victory of influence and lobbying power over the state's best interests."

The governor's signature makes the tax change law, but it likely is not the last step in the process.

Oklahoma City attorney Jerry Fent deli

vered a letter to the governor's office in which he said the bill violates the state constitution, which he said requires revenue bills to be approved by three-fourths of both the House and the Senate and that such bills should not be passed in the last five days of a session.

"Based upon your signing an oath to support, obey and defend the Oklahoma Constitution, I respectfully request you not approve HB 2562," Fent said in the letter. "If you approve HB 2562, I will consider filing an action in the Oklahoma Supreme Court to stop this bill."

(c)2014 The Oklahoman