The Oklahoma Independent Petroleum Association (OIPA) has filed a pair of legal challenges over a ballot initiative to enact an additional 5% gross production tax on oil and natural gas wells during the first 36 months of production, with the proceeds going to fund the state's education needs.
The ballot initiative, State Question No. 795, Initiative Petition No. 416, as filed with the Oklahoma Secretary of State. It calls for amending the state's constitution to create an Oklahoma Quality Instruction Fund. The 5% tax would be applied to oil and gas wells spudded after July 1, 2015. The measure would need 123,000 signatures before appearing on the ballot.
However, on Wednesday, OIPA filed two petitions with the Oklahoma Supreme Court, arguing that the "gist of the proposition" filed was unclear, and the measure includes biased language. The trade group also argued that the measure calls for enacting a retroactive tax, which it said is unconstitutional.
Currently, Oklahoma has a two-tiered gross production tax system that starts at 2% and increases to 7% after the first 36 months of production for new wells. OIPA said the ballot initiative would result in a 250% tax rate that could potentially be retroactive.
"The oil and natural gas industry is Oklahoma's defining industry and any tax increase, such as the proposed constitutional change, which will hamper investment and have a detrimental effect on the industry and the state economy as a whole is a bad idea," said OIPA President Tim Wigley.
OIPA’s A.J. Ferate, vice president, said "singling out one industry for a constitutionally enacted tax increase is not only unprecedented, it is bad public policy. By setting such a precedent, this state question could open the door to placing similar tax increases in the constitution on other Oklahoma industries like agriculture, manufacturing or aerospace."
Last April, the Oklahoma Energy Producers Alliance, which is composed of private and small operators, differed with OIPA and urged state lawmakers to raise the gross production tax to 7% to help resolve a budget crisis.
In 2014, Gov. Mary Fallin signed an industry-backed bill (HB 2562) modifying the tax rate on gross production. The bill, which took effect in mid-2015, set a 2% tax rate for the first 36 months of production, with the same rate for horizontal and vertical wells. The rate increases to 7% after the first 36 months of production. Later in 2014, legislation was passed that provided for a permanent, lowered tax rate for new oil and natural gas wells.