ND oil industry pushes for tax cuts

BISMARCK (AP) -- Trimming oil taxes during prosperous times will help keep the industry's jobs and revenue when energy prices fall, lobbyists argued Monday as lawmakers began reviewing bills to cut North Dakota's 11.5 percent oil tax rate.

BISMARCK (AP) -- Trimming oil taxes during prosperous times will help keep the industry's jobs and revenue when energy prices fall, lobbyists argued Monday as lawmakers began reviewing bills to cut North Dakota's 11.5 percent oil tax rate.

North Dakota's Tax Department estimates two measures would mean $231 million to $371 million less in tax collections over two years, although an oil industry spokesman said the figures should be considered in the broader context of the state's sharply rising oil production and tax revenues.

"If you look only at today's prices and activity, naturally one will wonder, why lower the tax now? But the concept is not to look just at today, next month, or next year, but to look forward in terms of decades," Ron Ness, president of the North Dakota Petroleum Council, said Monday during a House Finance and Taxation Committee hearing on the legislation.

Two Democratic lawmakers who represent one of North Dakota's busiest oil-producing regions are sponsoring a bill that would shave the rate to 9.5 percent while abolishing a host of tax incentives that normally would take effect if oil prices decline. The lowered rate would apply only to newly drilled wells.

Dickinson Rep. Shirley Meyer and Parshall Rep. Kenton Onstad said North Dakota's tax was the highest in the continental United States, and higher than the 9.25 percent tax in eastern Montana, which shares the Bakken shale rock formation that has spurred a recent oil-drilling boom in western North Dakota.


Rep. Keith Kempenich, R-Bowman, has a separate bill that would gradually reduce the state tax, depending on oil prices. The top 11.5 percent rate would apply only if oil prices averaged more than $65 a barrel for a month, Kempenich's proposal says.

If the price fell below $65, the tax would drop to 9.5 percent; if it went below $55, it would decline to 7.5 percent. Should the average price for any month fall below $45, the tax rate would drop to 5 percent.

Kempenich's legislation would also use a price benchmark that usually has lower prices than the present standard, which would make it easier for oil producers to qualify for a lesser tax rate.

The bill would rely on price quotes from Flint Hills Resources LP, a unit of Koch Industries Inc. of Wichita, Kan., which lists six categories of North Dakota crude in its pricing notices to suppliers.

During Monday's hearing, Onstad said he would prefer that his bill's tax rate be increased to 10.25 percent to lessen its effect on tax revenues.

Ness suggested lawmakers might find it more acceptable to whittle down the top oil tax rate in steps, rather than cutting it from 11.5 percent to 9.5 percent in one stroke.

"Nobody knows what the price will be in the future, but if we know what the tax is, we've reduced the uncertainty, which provides more predictability for the state and the industry," Ness said. "What the industry wants is predictability."

Oil production in western North Dakota has skyrocketed as companies have been able to solve the riddle of producing crude from hard Bakken shale rock.


Production has risen from about 79,000 barrels daily in January 2004 to 188,000 barrels two years ago, and 355,000 barrels last November, the most recent month for which data are available, according to the state Department of Mineral Resources.

The state should collect about $961 million in oil taxes during its current two-year budget period, which ends June 30, according to a revenue analysis by the Legislative Council, which is the research arm of the North Dakota Legislature.

During the 2011-13 budget cycle, oil tax collections are expected to top $2 billion, budget documents say.

Legislators acknowledge North Dakota's present oil tax system is a confusing welter of exemptions and incentives, many of them tacked on when lawmakers were trying to encourage production during bleaker times in the state's oil patch.

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.

The North Dakota tax rate that oil companies pay can bounce between 5 percent and 11.5 percent, depending on oil prices and the type of well being taxed.

Under current law, if the average oil price falls below a "trigger," which is set annually using published data, much or all of a well's production can be exempted from the extraction tax. The oil price must stay below the trigger price for five consecutive months to put the tax breaks into effect.

At present, the prospects for meeting the trigger are remote. It has been set at $46.78 for 2011; on Monday, the price of West Texas Intermediate crude at Cushing, Okla., was above $92 a barrel.


The legislation by Meyer and Onstad would eliminate the trigger and other incentives in exchange for a lower, flat oil tax rate.

Onstad said the existing tax structure is unfair to new oil companies doing business in North Dakota, because a new company cannot qualify for some tax breaks that existing companies enjoy. The actual tax rate for North Dakota's incumbent oil companies is probably closer to 10 percent, Onstad said.

"We're asking to bring them all together and make it a flat rate," Onstad said.

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