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An Argument Against State Tax Breaks for Oklahoma’s Oil and Gas Industry

Filed by KOSU News in State Impact.
October 24, 2012

Katsrcool / Flickr

A drilling rig near Edmond, Okla.

State tax breaks for Oklahoma’s oil and gas industry do little to encourage drilling, and amount to an unnecessary corporate subsidy, Oklahoma Policy Institute director David Blatt argues in a new issue brief.

Installation of these tax credits began in the early 1990s to offset losses from new and risky production techniques, like horizontal and deep well drilling. The problem, according to Blatt: Oklahoma taxpayers are now subsidizing what’s become “standard industry practice:”

As a result, oil and gas production has shifted increasingly towards horizontal and deep well drilling, and the cost of these tax breaks has skyrocketed.

Oklahoma’s economy depends on revenue from oil and gas and the overall health of the state’s energy sector, Blatt writes:

It provides the funding to educate our children, protect our communities, maintain our transportation grid, and assist those in need.

But the amount the state is paying out in tax rebates to oil and gas companies is growing — and “will continue to grow exponentially in coming years, reducing the resources available to fund core public services,” according to Blatt.

To help create jobs and build a strong economy, Oklahoma should eliminate or curtail its tax preferences for horizontal and deep well drilling in favor of more uniform tax treatment that will continue both to allow energy producers to operate profitably and ensure that the state can support the services that enable our families, communities and businesses to prosper.

Tax incentives rank low as a factor in determining whether energy companies drill, and don’t really affect the profitability of drilling, Blatt writes.

State lawmakers have changed the way oil and gas companies claimed such exemptions — after July 1, 2011, they became “front-end credits” rather than rebates — which Blatt details on Page 5 of the report, which you can peruse below.

The Case for Curbing Oklahoma’s Oil and Gas Tax Breaks

But some of Blatt’s starkest figures come from his analysis of horizontal drilling credits. In 2002, less than 5 percent of Oklahoma wells were horizontally drilled. In 2010, it ballooned to nearly 30 percent. And it’s projected to rise to more than 40 percent when the 2011 numbers are confirmed.

State payouts for the horizontal drilling exemption have followed suit, from $2 million in FY 2004 to $83 million in FY 2010, according to Blatt’s analysis:

In total, the state has paid out or accrued some $645 million in tax breaks for horizontal and deep wells in the past three years (which includes rebates paid out for earlier production). Horizontal drilling tax breaks alone have totaled $537 million.

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