Rod St. Aubyn: Projected Oil Prices And The Legislature

Rob had an interesting blog story on Saturday evening about the possibility that the oil boom in Western North Dakota may be over.  With the lower oil prices partially caused by OPEC’s war against America’s oil shale production, this fact could have an interesting effect in the upcoming legislative session.

Utility Budgets – Historically lower gas prices put pressure on other utilities resulting in other reduced utility costs.  Keep in mind that most state agencies were preparing their budgets, which also includes their utility costs, early this past summer when oil prices were significantly higher.  While utility and gas costs are a small part of many state agencies, budgets for entities like the state capitol, department of transportation, and especially higher education are greatly impacted by utility cost changes.  Though utility costs are a small factor in the overall state’s budget, it still amounts to a lot of money.  Just as predicting oil prices for the next biennium, budgeting utilities becomes just as problematic for state utility managers.  Senate and House appropriation members will be reviewing these numbers very carefully.

Revenue Projections – If there is indeed a significant slowdown in oil production and the number of rigs operating in the future, exactly what is financial impact to the state – not just in oil production taxes, but also in other taxes such as income taxes and sales taxes?  If there are fewer rigs, most likely this will impact the number of employees working the oil fields and other service jobs.  Fewer employees will result in less income taxes and sales taxes collected.  I personally don’t think that “the sky is falling” in regards to oil production.  Many oil experts also seem to share that same opinion.  While there may be some “slowdown” in the near future, few are predicting a total collapse of the oil sector.  However, determining the state’s revenue projections will be no easy task.  The legislature will be very dependent and curious about the state’s financial consultants’ estimated revenue projections.

Legislative Priorities – In my humble opinion, this possible oil production slowdown could have a very positive impact on state appropriators.  Legislative leaders and appropriators will be forced to realistically look at the state budget to decide state priorities.  As I had mentioned in an earlier SAB story, I felt that this session could be one of the toughest sessions for legislators.  There was a feeling that ND had so much money that ANY funding request should be funded to some degree.  Most legislators know that this is not necessarily true, but many interest groups will be putting pressure on legislators to fund their pet projects.

Western legislators and their constituents are expecting significant state relief for infrastructure needs and a larger portion of oil taxes being returned to those oil impacted areas.  Prior to the recent oil price reductions, there seemed to be a lot of support for those requests.  It will be interesting to see whether legislative views change or if these needs continue to be a priority for the upcoming legislative session.

With the public perception that there was “way too much money coming to the state”, there were many citizens arguing for some type of tax reform so the public would get some tax relief.  Several bills have already and will be proposed for different types of tax reform.  An earlier SAB story talked about bringing the state income tax rate to zero.  The Governor’s budget promised $408 million in additional tax relief during the 2015-2017 biennium.  With the reduction in oil prices what impact will that have on these tax reform proposals?

I often hear that much of the oil money is being used for “one time expenditures” such as infrastructure and buildings.  While I generally agree with that approach, but you have to ask yourself if these are actually one time expenditures or are these projects that will result in future costs?  For example, a new building may be built with these “one time funds”, but how are they to be maintained and heated/cooled once it is built.  Regarding infrastructure, if a new road or bridge is built do we honestly think that there will never be a need for repairs or replacement?  I am not saying that these projects are not needed, but we should dispel the myth that they are truly “one time expenditures.”

I read a recent story (December 26, 2014) on Politico entitled “GOP learns lessons from Sam Brownback’s tax scare.”  Sam Brownback is the Governor of Kansas who was successful in implementing massive tax cuts.  However his plan is not being seen as a success now.  The article states “Although income taxes composed of almost half of Kansas’ general fund, Brownback said the cuts would grow the economy and attract new business, so that revenue would spring back quickly, essentially paying for the cuts.  He had Reagan-era tax guru Arthur Laffer at his back supporting him.”  The article goes on to say, “But his plan didn’t pan out.  Revenues are way down, and job growth remains below the national average.  His own budget director says they may have to stop some of the tax cuts from going into effect, according to a New York Times interview.”

The article quotes Republican leaders from other states that want to also eliminate or reduce their income taxes, but have stated that they will take a slower approach than Kansas.  The economies of Kansas and North Dakota are not the same.  However, it will be very interesting to see what impact that the reduction of oil prices will have on tax reform proposals during the next legislative session.

ND legislators will have some big decisions to make during the 2015 Legislative Session with the uncertainty of oil prices.  Those decisions may ultimately impact your favorite “pet project”, your preferred tax relief proposal, or your own prized budgetary approach.  However because of the uncertainty I have confidence that legislators will diligently review all proposals and be forced to prioritize them.  You may not agree with their final decisions, but give them some credit.  They will hear from all sides.  And that is what elections are all about.

I want to wish everyone a happy and prosperous 2015.