With oil prices plunging one major area of concern for North Dakota, aside from the economic downturn that would result from declining oil activity, is the impact on the state budget.
Lower oil prices means less revenues for the state, particularly if two tax trigger landmines embedded in the code are invoked. Those triggers fire when oil prices pass a certain level.
Most of the attention has focused on the larger of the two triggers which would cut the effective oil tax in half if the price of WTI crude falls below $52.58 per barrel for five straight months (it stays that way until prices exceed the trigger price for five straight months).
But there’s another trigger in the law which takes effect if the average price of WTI crude for the last 30 days is less than $55 per barrel. Below is a document prepared for lawmakers by Legislative Council which explains it all, but here’s what is required if the trigger triggers:
So how close are we to this happening? Pretty close.
Per the Energy Information Administration, this is the trendline for the price of WTI crude from December 1st through the 29th (the last day for which the EIA has prices posted):
The price has been under the magic $55 per barrel number since the day after Christmas, but remember we only need the average of the past 30 days to be under $55 per barrel. Obviously, oil prices are volatile, but if we have an average per-barrel price of around $51 barrel for another 10 days or so we’re going to hit the trigger.
Granted, this trigger isn’t nearly as severe as the one that hits at $52.58, but lawmakers tell me it would amount to about a 2 percent reduction in the overall oil tax rate, so we’re talking millions and millions of dollars.
All the more reason why the oil taxes should have been reformed last session, something Senator Lonnie Laffen covers elsewhere on SAB today.