February 2, 2011


By Neal A. Shipman
Farmer Editor

North Dakotans are a pretty smart bunch when it comes to taxes. We know that we don’t like to pay any more than we absolutely have to when it comes to sales or income taxes. And, even though it is our local property taxes that are used to fund our county and city governments, as well as provide the money for our schools, fire departments and other local governmental services, most North Dakotans don’t like the concept of paying those taxes either.
Maybe we’re not a lot different than most Americans. We grumble when we have to pay our “fair share” of taxes. While we do pay our taxes, in reality, like everyone else, we’d just as soon have somebody else carry the load for us.
In North Dakota, we have found that “somebody else” to carry that load - the oil and gas industry. During this biennium, the oil and gas industry will be pumping up to $1.4 billion, via a 5 percent production tax and a 6.5 percent extraction tax, into the state of North Dakota’s treasury.
And now the oil and gas industry, along with former Gov. Ed Schafer, is calling for the state to reduce the 11.5 percent tax in an effort to keep the oil companies drilling and producing oil in North Dakota on a long-term basis.
Which is raising the question, “Does it make sense to reduce North Dakota’s production and extraction taxes for the oil industry?”
The answer is “Yes” and “No.”
Everyone who has any familiarity at all with the history of the oil and gas industry in North Dakota will tell you that it is a very fickle industry. It comes and it goes. Hence, the booms and the busts that we have seen over the past 60 years. When oil prices are high, as they were in the ’70s and early ’80s, the oil industry in North Dakota was booming. When the prices fell, the industry packed up and moved on to greener pastures. And now with high oil prices and the huge drilling success in the Bakken and Three Forks/Sanish formations, the oil industry is back in western North Dakota in full force.
Were North Dakota’s taxation rates the reason that oil companies came and left in the ’70s and ’80s? Probably not. Nor did the energy companies that set up shop in North Dakota in the last several years to develop the Bakken and the Three Forks/Sanish formations probably give more than a moment’s thought to the state’s taxes. The oil was here to be developed and they came. And they paid the state’s taxes.
That said, it is important to note that North Dakota’s combined oil and extraction taxes are among the highest of any oil producing state in the continental U.S. Which means that at some time, North Dakota’s higher taxes on the oil and gas industry will put us at a disadvantage. Just as some states use their low income or corporate taxes as an incentive to lure new business and industries to their state, North Dakota’s high taxes on the oil and gas industry could come back to haunt us.
Having a tax structure that encourages new businesses to set up in a state is vital to every state’s economy. But even more vital is having a state tax structure that keeps businesses from jumping to another location. And North Dakota needs to make every attempt to make sure that its tax structure is sound and doesn’t appear to penalize any one industry.
So yes, North Dakota’s taxes on the oil and gas industry need to be carefully evaluated. If they are too high, then the Legislature needs to adjust them just as they did with property tax relief for the taxpayers of the state.
But, the Legislature needs to move very cautiously before considering any reductions in taxes on the oil and gas industry. While the oil and gas industry will be pumping billions of dollars into the state’s treasury and has infused new life into many North Dakota communities in western North Dakota, it has also created a whole new raft of funding issues that this legislative session must address to help communities and counties in the oil-impacted areas. High on that list of needs is providing state funding from a portion of those oil and gas taxes to help pay for new school classrooms and teachers, assisting communities to develop needed infrastructure improvements to allow for new residential construction and city growth, more funding for county and state road improvements, as well as the development of rural water systems that are a direct result of this latest energy boom.
Until the state of North Dakota can adequately take care of these looming needs, it would be foolish to consider lowering taxes on the oil and gas industry.