During the closing weeks of the 2015 legislative session lawmakers went to battle over a contentious reform to the state’s oil tax laws. With the possibility looming of a tax exemption triggered by low oil prices wiping out the 5 percent oil extraction tax entirely and blowing a multi-billion dollar hole in state tax revenues, lawmakers sought to get rid of that exemption. They replaced it, over strenuous objections from Democrats, with a slightly lower and flatter tax.
Starting on January 1 2016 the state’s combined oil production and extraction taxes will be 10 percent under $90 per barrel . Over $90 per barrel the rate will be 11 percent. Currently, according to Tax Commissioner Ryan Rauschenberger, the industry is paying a top effective rate of about 11.1 percent.
But one objection to these changes, touted by Democrats, was the possibility that they might prompt the Three Affiliated Tribes to withdraw from an oil tax accord they have with the state. A big chunk of the state’s oil production happens on tribal lands, and the tribe is a sovereign entity and need not necessarily comply with state laws. The current accord was created in 2008 to simplify arcane tribal tax policy which was prohibitive to oil development on the Fort Berthold Reservation (just one oil well had been drilled prior to the agreement). Since then the agreement has paid big benefits for both the tribes and the state.
In fact, according to this forecast from Legislative Council from back in January the tribes were expected to take in as much as $314 million in revenues from this tax agreement by the end of the 2013-2015 biennium on June 30. Of course, lower oil prices have undoubtedly taken a chunk out of that total, but suffice it to say that it’s a big chunk of money for a tribe with just over 10,000 enrolled members (just over 4,000 living on the reservation).
But tribal leadership is making noises about being dissatisfied with the changes to the oil tax code by the Legislature. “New North Dakota oil tax law may threaten accord with tribes,” is the headline from the Associated Press which reports tribal chairman Mark Fox as saying that the changes to the tax code might not leave his tribe with enough money:
Three Affiliated Tribes officials said they’re not happy with the tax cut because more money is needed to pay for oversight, road repairs and other consequences of oil development. Tribal leaders have threatened to pull out of the oil tax revenue-sharing agreement — which has raised nearly $1.5 billion for the state and the tribes to date — because of the tax cut that takes effect in December.
“We still have to crunch a bunch of numbers,” Three Affiliated Tribes Chairman Mark Fox told The Associated Press Wednesday. “We still have to figure out if we’re better off with the agreement or not.”
Fox, an attorney, said the tribes want the oil industry to keep drilling “but at the same time we need enough money to offset the impacts.” The health and safety of tribal members on the Fort Berthold Reservation comes before oil development, he said.
Those seem like reasonable concerns from Fox and his tribe, but what’s missing from the Associated Press article are actual numbers illustrating what sort of impact the tax policy changes will have on tribal revenues. And those numbers really do exist. The Legislature considered them before they passed HB1476 to change the tax code.
Here’s a document from Legislative Council (see it in full below) which illustrates the impact of the change. What you’re looking at is the second line item from the top:
What this shows is that the Three Affiliated Tribes was actually forecast, at the time HB1476 passed, to see a $2.4 million increase in revenues.
Now, to be fair, this forecast assumes that the “big trigger” will hit for 11 months in the coming biennium. That doesn’t seem likely to happen now thanks to a slight rebound in oil prices, so the increase/decrease number above is helped by the fact that it assumes the tribe will benefit from the “big trigger” ending earlier than expected on January 1st, 2016 when HB1476 becomes law (the state’s March revenue forecast saw the trigger in effect from June 1, 2015, through April of 2016.
So the tribe may actually see a decrease in revenue from what they would have gotten had the law stayed as it is now, but that will also be because the state managed to just barely avoid the “big trigger” hitting. The tribe’s revenues will be substantially more thanks to the avoidance of that trigger.
How, then, can you really say that HB1476 is costing the tribe anything? If the “big trigger” hits they’d collect about $2.4 million more in revenues than they would have thanks to HB1476 per the numbers above. If it doesn’t hit, they’ll collect even more. Just not quite as much as they would have had HB1476 not passed.
Which was sort of the whole point behind HB1476. The idea was to avoid these wild revenue swings thanks to tax rates based on complicated oil price calculations.
Will HB1476 end up costing the Three Affiliated Tribes revenues? Maybe, maybe not. The oil markets are complicated. But one thing both the tribe and the state are getting from the reform is certainty. I think it would be foolish if the tribes didn’t recognize the wisdom in that.