Oklahoma’s highest court has said “OK” to an oil and gas production tax.
In a pair of rulings Monday, the Oklahoma Supreme Court ruled unanimously in favor of 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 proceeds funding state education needs.
State Question No. 795, Initiative Petition (IP) No. 416, as filed with the Oklahoma Secretary of State, calls for amending the state constitution to create an Oklahoma Quality Instruction Fund. The 5% tax would be applied to oil and gas wells spudded after July 1, 2015.
In January, the Oklahoma Oil & Gas Association (OKOGA) and the Oklahoma Independent Petroleum Association (OIPA) filed lawsuits over the ballot initiative, arguing that it was unconstitutional because it violated the one general subject rule and creates a retroactive tax. The court disagreed.
“After fully considering opponents’ arguments concerning the continued applicability of the germaneness test and their constitutional challenge, this court concludes that…the new article proposed by IP 416 does not violate the single-subject requirements of the Oklahoma Constitution,” the court ruled in OKOGA v. Thompson (No. 116682). The justices issued a similar ruling in OIPA v. Potts (No. 116679). However, in the OIPA case, it said the ballot initiative “does not create a retroactive tax in violation of U.S. Constitution.”
Chief Justice Douglas Combs, Vice Chief Justice Noma Gurich and Justices James Edmondson, Yvonne Kauger, John Reif, Jim Winchester and Patrick Wyrick ruled in favor of the defendants. Justice Tom Colbert was recused from both cases.
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.
Last year, 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.
“It’s easy to look at the oil and natural gas industry for a quick fix when the state is facing economic hardships, but raising taxes on a single industry is not a cure-all for every financial woe,” OKOGA President Chad Warmington said. “It is dangerous to further tie teacher salaries and education funding more strongly to a revenue source that fluctuates radically.
“Should this measure make it to the ballot, we will educate the public on the consequences of passing such an initiative, including the job losses it will cause in the energy sector. We believe teachers deserve salary increases and schools deserve adequate funding, but raising the gross production tax yet again is not a long-term solution. We will continue to work with our state leaders and educators to find a sustainable answer to this problem.”
Four years ago Gov. Mary Fallin signed industry-backed stateHouse Bill 2562 to modify 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.
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