Low oil prices are putting a dent in the treasuries of many of the nation’s biggest oil-producing states, forcing them to cut spending, raid rainy day funds or even reassess how they finance state government.
Monthly revenue from oil taxes has fallen by anywhere from 45 percent to 75 percent in the nation’s top 10 oil-producing states since collection highs in July of last year, as the price per barrel of crude dropped from $103 in July to $54 in April.
Most of the top 10 oil-producing states tax the industry by the barrel taken out of the ground, with the rates varying from state to state. As oil prices have dropped, the industry has pumped fewer barrels in some states because it’s become less cost effective. Dependence on oil has also led to falling sales and income tax revenue in some states as the industry has laid off workers, cutting 3,000 jobs last month alone.
Some states tax oil differently. Pennsylvania, for instance, charges oil companies an impact fee, paying a fee for every drill. California gets part of its oil tax revenue from a flat charge of 36 cents on each gallon pumped from the ground.
None of the states is feeling the pain quite like Alaska, which depends on oil tax revenue to fund three-quarters of state government, the most of any state. The state’s monthly oil revenues have dropped by about 75 percent since the beginning of the fiscal year, leaving a $3.6 billion deficit and a special session stalemate between legislators and independent Gov. Bill Walker that could lead to a government shutdown if a budget isn’t passed soon.
This year’s budget crisis may not be Alaska’s last. The state has just enough money, $9 billion, in its rainy day fund to keep government afloat for three more years, said Jerry Burnett, deputy commissioner for the state’s Department of Revenue.
That prompted Walker to call a three-day summit of leaders from a variety of industries next month to discuss what size of state government the people of Alaska should expect and how it should be paid for.
“I suspect that if oil prices stay down that’s not going to be a revenue source big enough to fund government in Alaska, so yes, I think the discussion is going to be along the lines of how big government needs to be and how we’re going to fund it,” Burnett said of the summit.
Part of Alaska’s problem is the decline in oil production. The state has been dependent on two major oil fields for decades, while new, smaller fields have been difficult to develop.
The situation is forcing lawmakers to consider other taxes or spending cuts to cover this year’s deficit and to finance state government down the line.
“It’s now no longer the case where we have the price and production volume where we can depend on one source of income for the budget. It’s time to diversify for sure,” said Republican state Rep. Paul Seaton. He has proposed extending the state’s income tax to businesses registered as limited liability corporations, or LLCs, which currently don’t pay it.
House Minority Leader Chris Tuck, a Democrat, said the state should focus more on changing its oil tax policy by sticking to its budget and limiting how much the state pays out in tax credits to the industry each year. Currently, oil companies are eligible for a number of state tax credits based on exploration, development or production of oil. Once the state reviews the expenses, oil companies are presented with a certificate which they can redeem any time for cash. Tuck thinks the state should not pay more than $500 million a year in redemptions. Any certificates presented after that cap would be the first to get paid the following year.
Cuts to education and seniors’ programs also have been proposed this year to balance the budget. One program not being cut: the dividends program, which pays Alaska residents a portion of oil tax revenue, which was almost $1,900 per person in 2014.
Read Original Article – Published May 22, 2015
Tax Revenue Plummets in Oil Producing States
