Double Taxing the Oil Industry Is a Good Way for the Three Affiliated Tribes to Lose a Lot of Money

File Photo: Flares and lights from oil wells dot the horizon on the Fort Berthold Indian Reservation, just over the Missouri River from New Town, North Dakota November 1, 2014. REUTERS/Andrew Cullen/File Photo

UPDATE: A reader points out that the Three Affiliated Tribes owns their own oil development company called Missouri River Resources. That seems like a very big conflict of interest. A tribal-owned oil company is going to be operating at a distinct advantage under a dual state-and-tribal tax regime.

Back during their 2015 session North Dakota lawmakers removed from the oil industry a massive tax exemption triggered by low oil prices. They did so before low prices actually triggered it, keeping the state from losing hundreds of millions of dollars in revenues during a time of severe revenue shortfalls.

In exchange for the removal of that exemption lawmakers also lowered the state’s combined extraction and production taxes from a top rate of 11.5 percent to 10 percent.

Since then Democrats and their various mouthpieces have been braying about “tax cuts for big oil,” only the net result of the policy changes was hardly a tax cut. This chart shows in blue the actual revenue collections since this policy was implemented through February of this year. The red bars represent what the state would have collected under the old policy:

It’s a strange sort of arithmetic that can allow you to conclude that policy change which result in taxed companies paying more in taxes is a tax cut. But that sort of unrepentant lying is just the sort of thing which happens in politics.

Anyway, a wrinkle in all of this is that the State of North Dakota is in a tax agreement with the Three Affiliated Tribes of the Fort Berthold Reservation where a significant amount of the state’s oil production takes place. The tribe hasn’t liked the policy change since it was implemented, and have now gone back and implemented their own tax on top of the state’s tax to supposedly make up for lost revenues.

This from the Bismarck Tribune:

[Three Affiliated Tribes Chairman Mark] Fox said it never agreed to the change and the tribe still wants its share, which is half of the 1.5 percent rate that was forgiven by lawmakers. He estimated the sum to be about $17 million.

“Our expectation is for them to pay what is due under the mutual tax agreement with the state,” Fox told The Associated Press.

Fox is making it sound like the tribe has lost revenue because of the state’s actions, but that’s just not true. The net result of the end of the low price exemption, and the decrease in the top tax rate, has been hundreds of millions of dollars for the state and the tribe which wouldn’t have been collected otherwise.

What lawmakers passed in 2015 was a net tax increase. What Fox is upset about is that he wanted a larger increase. Which is his prerogative, I guess, but I’m not sure the the outcome he’s pursuing is what’s best for his tribe.

Here’s a fundamental truth the tribe should keep in mind: Regulations are static, but markets are dynamic.

Private companies respond to changes in the tax code. Before the Three Affiliated Tribes entered into a tax agreement with the state, “only one well was drilled on the reservation, state and tribal data show,” the Tribune reports. That’s because oil companies didn’t want to operate under a dual (state and tribal) tax regime.

My guess is they still don’t. Meaning that even as Fox chases more revenues with a tribal tax on top of the state’s tax, the net result will probably be fewer revenues as oil companies pull back from development on tribal lands.

I hope that this is a short-term ploy by Chairman Fox aimed at giving himself leverage in negotiations with the state and not a long-term policy change. Because the latter, I think, will not serve the people of the Three Affiliated Tribes well.

Rob Port is the editor of SayAnythingBlog.com, a columnist for the Forum News Service, and the host of the Rob (Re)Port on Fargo-based WDAY AM970 from noon-2pm weekdays.

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