OKLAHOMA CITY – Advocates of Oklahoma energy want to retain an oil and gas incentive enacted last decade as a means to boost drilling and production. Gov. Mary Fallin’s key fiscal adviser, however, says leaving the levy at the level it reached under the temporary incentive is a “non-starter.”

In a state controlled from top to bottom by Republicans, the most important debates will take place among professed conservatives.

Focus of debate is the severance tax on horizontal drilling, nipped temporarily from seven percent to one percent when production was moribund.  

Speaker of the House T.W. Shannon,R-Lawton, early this month told reporters, “The current tax rate on horizontal drilling has been doing exactly what it was designed to do: encourage more drilling in Oklahoma. Therefore, I believe we should make this rate permanent and send the message that Oklahoma is a place that welcomes the oil and gas industry, along with the jobs and economic development they bring.”

Both the governor and the speaker outlined their respective positions over the last few months of 2013, with their differences becoming clearer as budget discussions intensified this year.

The Legislature convenes on Feb. 3, with the state budget the top agenda item. Preston Doerflinger, state Finance Secretary — and the Board of Equalization on which Fallin serves with several other statewide elected officials – project tax revenues about $170 million less than projected.

While the economy is thriving, provisions (including the energy incentives) have taken money “off the top” and out of the appropriations stream. Still, the Legislature will have nearly $7 billion to dole out this year.

The drilling incentive, passed during last decade’s doldrums for domestic energy production, had bipartisan support. The Legislature set out to boost the then-innovative horizontal method which, combined with hydraulic fracturing, promised increased efficiency and investment returns.

Subsequently, both petroleum engineering and economics (cost efficiencies and as the tax break) drove a dramatic shift toward horizontal drilling. In the words of a new analysis from the Oklahoma State Chamber of Commerce: “Most wells completed in Oklahoma are now drilled horizontally and hydraulically fractured.”

The practical argument for retention of the 1 percent rather than the 7 percent levy is simply that the lower rate has worked. Making the case to retain a lower tax, the Chamber analysis warned that although per-well costs have become manageable, “the average well cost could rise significantly in future years as more challenging formations in the state are developed.”

Fallin is not asking for a return to the full 7 percent rate, but for a tax somewhere between that and 1 percent.

A more ardent critic of the existing incentive is the Oklahoma Policy Institute, the state’s leading left-of-center “think tank.” The Tulsa-based group estimates the break is costing the state coffers $250 million annually. OK Policy’s executive director David Blatt says the Chamber’s study “ignores the fact that even if Oklahoma eliminated tax breaks for horizontal drilling, the effective tax rate would remain below or equal to most rival energy-producing states, including Texas.”

Michael C. Carnuccio, president of the Oklahoma Council of Public Affairs (OCPA), the state’s leading free-market research group, says the 1 percent tax performed as hoped, and that “Spiking the rate up to 7 percent overnight would be seen by many as a deterrent, and disincentive, to drill in the state,”  

The state’s largest newspaper, The Oklahoman, outlined in a recent editorial a possibly more palatable hike, in a sympathetic reading of a proposed change in the state fuel tax. The Oklahoma Academy, a nonprofit group that coordinates frequent policy discussions and forums, has suggested elimination of state taxes at the gas pump, replacing them with a price-based levy at the wholesale level. (Fuel taxes fund the state improvements to roads and bridges.)

The oil and gas industry appears united in support for the lower tax.

State Sen. Ralph Shortey, a south Oklahoma City Republican known for his independence, could be the kind of legislator that determines the incentive’s fate.

Shortey told Oklahoma Watchdog, “This is an incentive that provides meaningful tax relief for Oklahoma businesses, enabling them to sustain and create new jobs.  I am committed to doing everything I can to keep the current tax rate, and I hope my fellow lawmakers join me in opposition to this potential tax increase.”

You may contact Pat at pmcguigan@watchdog.org