The North Dakota House endorsed a bill Monday that will cut an exemption for oil companies if crude prices continue to slide, in exchange for a lower and permanent flat tax rate.
The House voted 57-32 to approve the measure that supporters believe offers predictability in crafting budgets, while opponents say it could cost the state billions of dollars in oil tax revenue in the long run.
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Democrats and leaders from the oil-rich Fort Berthold Indian Reservation in western North Dakota oppose the bill by the Republican-controlled Legislature that would restructure oil taxes as a hedge against falling crude prices.
"This is good policy," said Fargo Rep. Al Carlson, North Dakota's Republican House majority leader and the primary sponsor of the bill. "It creates a stable environment."
But Senate Minority Leader Mac Schneider, D-Grand Forks, said the proposal is "artificial and unwise" and will cost North Dakotans "tens of billions of dollars over the life of the Bakken."
The measure was introduced Friday, just 10 days before the state constitution's 80-day limit is imposed.
The proposal would permanently lower an extraction tax on oil by more than 30 percent instead of allowing a tax exemption to take effect that would be only temporary if oil prices rebound.
State budget analysts estimate that eliminating exemption would add $120 million in the next two-year budget cycle that begins July 1.
Oil industry representatives have pushed for an immediate change to a flat tax rate. Ron Ness, president of the North Dakota Petroleum Council, offered an amendment to the measure that would impose a flat tax on oil production at 9 percent. The House, however, did not accept it.
One-third of North Dakota's oil production comes from the Fort Berthold Indian Reservation. Three Affiliated Tribes Chairman Mark Fox said the tribes are opposed to the bill and will consider pulling out of a shared tax compact with the state if the bill becomes law.
North Dakota lawmakers acknowledge the state's present oil tax system is outdated and confusing, with exemptions and incentives that were put in place in even bleaker times and long before the state's current oil boom that began in earnest less than a decade ago.
The law has two principal oil taxes, a 5 percent production tax and a 6.5 percent extraction tax, which was imposed by a 1980 voter initiative during a previous oil boom. Both taxes are applied to the oil's value when it is produced, although the proceeds are split up differently among the state and local governments.
A state law forgives the extraction tax if the five-month average price of oil slips below a "trigger" price of $55.09. That trigger is expected to kick in June 1. Republicans want to lower the extraction tax permanently to 4.5 percent if the average price falls below that trigger, instead of giving companies the tax break.
North Dakota sweet crude was fetching about $56 on Monday but has been well below that in recent weeks.
Under the current tax system, the $55.09 average monthly price would have to be exceeded for five straight months before the extraction tax resumes. Economic consultants who have helped estimate North Dakota's tax collections 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.