Raising The Gross Production Tax Will Undoubtedly Lead to Government Mismanagement

— If We Significantly Raise Revenue Will We Be Creating More Situations Such As What We Saw At the Oklahoma State Health Department? —

Besides the fact that is a horrible idea to tie state public teacher salaries to one industry – especially to one as volatile (albeit important) to a state as Oklahoma’s oil and gas industry – has anyone thought of the simple fact that giving our legislature more money will probably lead to mismanagement?
If anything, what we have learned in the last number of legislative sessions is that our Oklahoma government is not run efficiently. There are many fears that opening the floodgates in terms of tax revenue will lead to dozens of Oklahoma State Health department situations.
Not only is it bad public policy to tie salaries to one industry, which I will dive into below, but we will also be creating a bigger government ripe for dysfunction and mismanagement.

As outlined in a recent essay for CapitolBeatOK (http://www.www.capitolbeatok.com/reports/commentary-boom-bust-recovery-and-punishing-success-punitive-steps-toward-oklahoma-oil-and-gas-are-u), also posted at The City Sentinel newspaper website (http://city-sentinel.com/2018/03/commentary-boom-bust-recovery-and-punishing-success-punitive-steps-toward-oklahoma-oil-and-gas-are-unwise/), the profitability of oil and gas production is cyclical.

A more colloquial way to put this is that this commodity is at the heart of the quintessential boom-and-bust business.
Nonetheless, most proposals for significant teacher pay hikes would finance a boost primarily with significant increases in the levies placed on the state’s key heritage industry. 

This is deeply unwise. A commodity industry subject to dramatic ups and abysmal lows (in terms of price and profitability) should not be the target of punitive tax policy. The state’s future, including what we pay public school teachers, is too important to use tax policy to punish those some consider too successful.
In the long run, punishing oil and gas would wind up punishing the Oklahoman economy. Pragmatically, that is the definition of foolishness.

Boom and Bust is the default setting for oil/gas — but right now Oklahoma is in a nice boomlet.

Robert Rapier, writing for the Energy Trends Insider in late 2015 (in the midst of an oil/gas recession)   (http://www.energytrendsinsider.com/2015/11/04/boom-to-bust-5-stages-of-the-oil-industry/) observed, 

“The history of the oil industry has been one of cycles, from nearly the beginning of the industry in the 1850s through today. In the down cycle that we are currently experiencing [in 2015], demand rises due to low prices, even as oil producers begin to cut capital expenditures. U.S. shale production has already begun to decline as very little shale oil production is currently profitable. The end result is very predictable, even if the timing is not. While there is broad agreement that a great deal of U.S. oil production is currently unprofitable, some feel like oil prices need to fall further to make a bigger dent in production because crude oil inventories are still quite high.”
Rapier continued, “I feel like with the continued growth in global demand; we can already see the supply/demand picture tightening on the horizon. When that becomes broadly obvious, oil prices will again rise, bringing profits to the industry and higher capital spending on new projects. How long that process takes will determine how many oil companies are left standing to reap those profits.”

Remember, he wrote those words in bad times. Of course, now we are in a period of prices high enough to be a bridge to more or less sustainable profitability. But if you doubt there will be ups and downs in the future, read the above two paragraphs again. 

The tax burden on oil/gas today

As for current taxes, critics of oil and gas assert that taxes on the industry range from only two percent to 3.4 percent. 
However, these analysts restrict their attention to “only” the gross production tax (GPT). 

Oklahoma City economist Mark Snead, speaking at the 2018 Energy Summit held at the state Capitol in January, took a more holistic view of taxation.

Drawing from his research, sponsored by the state’s oil and gas association, Snead reflected (as reported in Adam Wilmoth’s story for The Oklahoman), “We are not a low-tax state. We are toward the high end, and raising severance taxes even further push us toward being noncompetitive, the area where we could be considered an extremely high tax state.” (http://newsok.com/study-oklahomas-total-energy-industry-tax-rates-above-average/article/5580464)

Snead blended in, with GPT, ad valorem taxes, personal taxes paid by the industry’s workers, and levies on personal proprietors. 

As Wilmoth reported, the economist “measured the tax systems in the 16 largest oil and natural gas producing states. While Oklahoma’s gross production tax rate is among the lowest in the country, the state ranks No. 8 of 16 with a total effective rate of 10.6 percent when including all four major tax streams.” (emphasis added) 

What teachers are paid, and what that means in Oklahoma

Another part of this never-ending story over teacher pay (and public employee compensation, more generally) is what actual pay means in the place where they actually live – in this case, Oklahoma. Economist Byron Schlomach wrote, in a 2016 analysis for the 1889 Institute he runs, “While it is true that Oklahoma ranks 48th in average teacher pay when raw numbers are compared, Oklahoma’s low cost of living makes a difference when the spending power of teachers’ salaries is compared. Only Mississippi has a lower cost of living than Oklahoma.”

Giving a direct comparison to a state that advocates of much higher teacher pay admire, Schlomach writes:
“Even though Oregon’s unadjusted average teacher salary ($60,064), ranks 12th in the nation and is $15,000 higher than Oklahoma’s ($44,921), the percentage difference is just 34 percent, not enough to make up for Oregon’s much higher cost of living, which is 49 percent higher than that of Oklahoma.”

Bringing comparisons closer to home, the scholar reported: 

“A $5,000 pay raise for Oklahoma’s teachers would place Oklahoma’s unadjusted average two spots behind Texas, which currently ranks 25th in teacher pay unadjusted for cost of living. However, with cost of living taken into account, Oklahoma would rank 15th, just behind Texas, and second highest among our bordering states. Georgia would be the only southern state besides Texas to outrank Oklahoma.”  

Kahler Financial, a South Dakota business that monitors the economy and investments, put the Sooner State slightly lower, at 34th among the nation’s states in terms of teacher purchasing power. (http://kahlerfinancial.com/wp-content/uploads/2015/10/Teacher-Salary-Chart.pdf)

As for what Oklahoma can actually afford to enact and to sustain, the state government already spends 51 percent of its funds on public education at all levels – the vast majority of that on common schools (K-12). 

Dedicated funds are deficient.

Schlomach, in our recent exchanges, offered a middle perspective on the whole question of compelling dedicated streams from certain taxes (rather than keeping appropriations subject to legislative appropriation):

“You can already mandate that, at a point in time, new money be exclusively used for teacher pay raises without requiring that the new funds be spent on teachers from now on. All permanently dedicating the money does is complicate the accounting – from now on.”

He continued, “In Oklahoma, the money practically disappears from the books because it wouldn’t be ‘appropriated.’ Dedicating funds in Oklahoma is paramount to being less transparent – i.e., hiding the spending.”

Another way to examine this part of the question is to look at broader individual taxation categories, much as Snead did for the energy industry in particular.

In a recent online post, former state Rep. Paul Wesselhoft, a Moore Republican, pointed to the annual survey “Rich States, Poor States,” and its step-by-step look at taxes and spending.
In its April 2017 report, the American Legislative Exchange Council, a group for conservative state legislators found, as Wesselhoft summarized, that America’s ten best states for business conditions were Utah, North Dakota, Indiana, North Carolina, Arizona, Idaho, Georgia, Wyoming, South Dakota, and Nevada.
The worst states, on the other hand, were New York, Vermont, Minnesota, Connecticut, New Jersey, Oregon, California, Montana, Maine, and Pennsylvania.
Oklahoma fell into the broad middle in most categories, neither best for robust business development, nor best for robust government growth. 

As pointed out in my prior commentary, dedicated funds wind up growing government more than benefiting the intended beneficiary. They are deficient, both in supporting desired functions of government and in growing the economy.

Right now, Oklahoma government revenues are growing due to a strong economy.

Which brings us, more to less, to today. 
State Treasurer Ken Miller, in his most recent report on gross revenues to the state government, said this: 

“Oil and gas gross production tax collections brought in $593.8 million during the 12 months, up by $226.5 million, or 61.7 percent, from the previous period.” (http://www.www.capitolbeatok.com/reports/february-2018-gross-tax-receipts-up-15-5-percent-over-february-2017-treasurer-ken-miller-reports)

That’s almost 62 percent. 

Oil and gas surges and declines are always more dramatic than the ups and downs in other business sectors. This simply reflects the fact (hopefully not belaboring the point) that oil and gas is boom/bust business, more volatile in historic terms than most.

When times are good, they are very good. When they’re bad, … 

Wisdom and measured policy is needed before times are bad and should whenever possible be fashioned during the good times (into which the state is clearly bridging).

A feeding frenzy is unwise because while the days of feasting are satisfying for many, the time of famine (allegorically speaking) will come again. Those who talk about “sustainability” should be especially sensitive to this reality. 

Have I mentioned that the oil and gas business is cyclical? And that “cyclical” means that more than for most industries, in this one what goes up (a lot) must come down (and often significantly)?

Does it not make sense to take a supportive approach toward such a business, tax-wise, and to avoid over-reliance on it in budget planning?

Many are familiar with the oilman (and oilwoman’s) prayer – “Lord, give me one more boom, and I promise this time I won’t screw it up.” 

The closely related budget planning prayer should be: “Lord, thank you for the current boom. Give us the wisdom of Solomon, to use resources prudently in these times.” 

Let’s don’t screw it up. 

Final thoughts, for now

While government revenue is now surging, this will not always be the case. No matter how much this or a future Legislature increases the tax burden on individuals and businesses, bad times will follow good times, as surely as night follows the day.

To focus the issue in a practical away, think this though: In a future year when things are not good, economically — and the oil/gas business is ailing – what be the actual result of relying overmuch on a boom/bust business for the funding stream behind teacher pay? Even more, we are at a crossroads in our state government and it, while not popular to say, it is worth considering that if we have had the current cycle of poor management, what will make that change? Simply put, if we give our government more money, do you trust they will spend it appropriately? 

NOTE: An educator and journalist, McGuigan is a member of the Oklahoma Journalism Hall of Fame. He is founder and editor of CapitolBeatOK.com, an online news organization, and editor/publisher of The City Sentinel newspaper in Oklahoma City. He is a certified teacher in 10 subject areas.