When It Comes to Taxes, Oil and Gas are Literally Fueling Some States’ Economies

A major concern in the oil and gas industry is that prices have been low for the past few years. During Bloomberg BNA and Mayer Brown’s Energy Tax: Maximizing Value conference on Sept. 19 and 20 in Houston, panelists and guest speakers scrutinized and discussed this, along with several other issues facing the oil and gas industry. US Country Chair and President of Shell Oil Company, Bruce Culpepper, touched on the pricing issue during a morning keynote address. One panel specifically discussed the impact of low prices on state economies.  

Among oil and gas producing states, such as Alaska, California, Louisiana and Texas, taxation systems have proven to be important for determining the impact of low oil prices, as Nushin Huq originally reported in Bloomberg BNA’s Weekly State Tax Report on Sept. 21. 

Because Alaska is so dependent on the oil and gas industry, the drop in prices and production has hurt the state, which is now in a major deficit crisis. Kara Moriarty, President and CEO of the Alaska Oil and Gas Association, referred to her state as getting “winner, winner, chicken dinner” status in regards to oil price impact. She explained that oil and gas taxes are a major source of revenue for the state, making up 80 to 90 percent of the money in the general fund. In Alaska, while there is a corporate income tax, there is no individual income tax or sales tax.

Another component of the Alaska issue is the state’s Permanent Fund Dividend. Each state resident receives a portion of dividends from energy revenue in the Permanent Fund each year in cash payments; the dividend amount must be passed into law annually.

Moriarty noted that three Alaskan politicians have sued Gov. Bill Walker (I) for using line-item vetoes on the 2017 appropriations bill to cut the money that each state resident will receive in their annual Permanent Fund dividend checks in half; the lawsuit seeks to deliver all the bill's designated money to residents.

She advised panel attendees to be on the lookout for attempts during the 2017 legislative session to establish a state sales tax or personal income tax to mitigate the damage low prices will continue to have on the state.

Texas Taxpayers and Research Association President Dale Craymer said that while his state is affected every time that there is an oil and gas downturn, this time they’ve had a “reasonable cushion.” He also said that their production tax revenue has been good, and that severance tax revenue has not dropped as much as the state had anticipated. Natural gas tax revenue, though, has not been faring as well as these other two. Craymer also predicted more focus on the property tax when the Texas legislative session begins next year.

Louisiana, another prominent oil and gas state, has also been experiencing its own budget crisis. Paul Broman, Senior Managing Tax Counsel for BP, explained that the state caused its own budget problems because it did not properly plan expenditures after Hurricane Katrina. He did say that Louisiana was able to react in the oil price drop quicker than some states, however.

On the sunny side of the spectrum, Paul DiSangro, partner at Mayer Brown in Palo Alto, explained that California’s diversified economy has insulated the state from the effect of low prices.

These varied responses do certainly suggest that a state’s tax base, in addition to expenditure practices, can determine whether the treasury has a full tank.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What measures do you think Alaska should take to mitigate their deficit crisis?

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