North Dakota Lawmakers Proposing Fixing The State's Ridiculous Oil Tax Trigger


North Dakota’s existing oil tax code is a disgrace to public policy. Among other confusing exemptions it includes two triggers based on oil prices which kick in lower tax rates. In fact, thanks to plunging oil prices, the clock is currently ticking on the “big trigger” which will reduce state revenues by billions of oil prices stay low.

Revenue projections lawmakers are currently using for budgeting purposes have predicted that the “big trigger” will be in place for at least 11 months of the next biennium (see here) costing the state more than $5 billion in tax collections, though with oil prices on the rise again it may not kick in at all.

Regardless, embedding this sort of brinksmanship into tax policy is a terrible idea. Taxes should be flat, as low as possible, and (most importantly for this issue) predictable. Meaning the state and the oil industry shouldn’t be bracing themselves for wild swings in taxes based on something as volatile as oil prices.

Yet efforts to fix this abysmal situation in the past have failed, with Democrats effectively cowing Republican reformers by promising to paint changes in political campaigns as handouts to big oil. “To the extent that we ‘forced’ the GOP majority to abandon that flawed proposal, well, good for us,” Senate Minority Leader Mac Schneider wrote in an op/ed in January defending his party’s role in killing legislation to replace the tax triggers and exemptions with a flat oil tax.

Of course, with the possibility of the trigger kicking in looming, Democrats have been walking back some of that bravado.

And maybe now that Republicans are looking to replace the triggers with a flat tax Democrats will put the politics of oil industry bashing on the shelf and get behind reforms that are good for the industry and the state:

BISMARCK – North Dakota Republicans are proposing a late-session bill that would hedge against the loss of tax revenue from low oil prices by cutting oil taxes instead of allowing an exemption to take effect that could cost the state billions of dollars.

The “trigger on the trigger” would permanently reduce the state’s oil extraction tax from 6.5 percent to 4.5 percent if the so-called “large trigger” incentive kicks in June 1 as expected. The state’s 5 percent oil production tax wouldn’t be affected.

Senate Majority Leader Rich Wardner, R-Dickinson, said the oil industry has indicated it will “reluctantly” go along with the plan, even though it will mean higher taxes for them, at least in the short-term.

“What they’re going to get is stability,” he said during a Senate Republican caucus meeting this morning.

So, basically, if the “big trigger” hits instead of the oil extraction tax going away entirely (until oil prices go above the trigger price for five months) instead a permanent flat tax with a top rate of 9.5 percent will be implemented (currently the top rate is 11.5 percent).

The industry pays a higher tax in the short term, but they get a predictable and flat tax that’s a little lower at higher oil prices going forward. And the state also gets some stability in that these triggers will no longer be throwing the state’s budget process into chaos.

What’s so bad about that?

Update: Here’s a clearly butt-hurt Mac Schneider calling the proposal “an arrogant power tactic unlike anything I’ve seen in my four sessions.”