With oil prices sinking enough that drillers may soon see a more favorable tax rate, North Dakota lawmakers approved a new framework Friday that cuts the price-triggered exemption in exchange for a lower tax rate.
North Dakota's House voted 66-26 after a contentious debate to shave the state's oil tax rate from 11.5 percent to 10 percent. Republicans believe the move offers better certainty for the state and industry, while Democrats say it could cost the state billions in future oil tax revenue.
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"We're taking a real risk and probably something we can never get back," said Rep. Jerry Kelsh, D-Fullerton.
Fargo Rep. Al Carlson, North Dakota's House majority leader, and other GOP representatives said the new system will provide a stable and predictable tax policy that will help increase production, spur investment and boost the state's economy.
"We need to have what's fair, what's reasonable for both sides and what we can count on for future generations," Carlson said.
North Dakota produces about 1.1 million barrels of oil a month, making it second only to Texas among U.S. states. New technologies such as hydraulic fracturing have spurred the boom in the past decade, and high oil prices made the difficult extraction worthwhile. But oil prices have fallen globally, and North Dakota sweet crude was fetching about $55 a barrel this week, down from more than $100 several months ago.
The measure restructuring the state's tax framework now goes to GOP Gov. Jack Dalrymple, since the Senate endorsed it on Thursday. Dalrymple's spokesman Jeff Zent said the governor had not studied the bill.
"Generally speaking, a flat tax offers the advantage of greater economic certainty," Zent said. "But the details of any plan are very important, and we haven't seen a final proposal."
For nearly 30 years, some North Dakota tax breaks for the oil industry have been linked to a price "trigger." The incentives ended if oil prices went above the trigger and they were re-established if prices went below.
North Dakota has two primary taxes on oil production — a 5 percent production tax and a 6.5 percent extraction tax, which was part of an initiated measure that voters approved in November 1980.
A state law forgives the extraction tax if the five-month average price of oil slips below a trigger price of $55.09. Unless oil prices rebound sharply in the next month, that trigger is expected to kick in June 1.
State budget analysts have estimated the trigger would be in effect from June through April 2016, costing the state an estimated $863 million in lost revenue during that time.
Tribal leaders on the Fort Berthold Reservation, which accounts for about a third of North Dakota's production, had threatened to pull out of a shared tax agreement with the state if the triggers were kept in place.
The legislation would lower the extraction tax to 5 percent and would permanently eliminate the trigger after Dec. 1. The bill also would raise the total oil tax to 11 percent if oil prices rise to $90 a barrel for three consecutive months. The state's 5 percent production tax is unaffected by the legislation.
State budget analysts estimate bill would add $35 million in tax revenue over the next two years.