The political debate surrounding the Republican decision to cut the oil extraction tax in 2015 continues over two years later. Rightly so, because this rushed change to North Dakota’s oil tax collections is having profound long-term impacts on our state budget. Moreover, the Republican decision to cut the oil extraction tax was passed and implemented without any study or prior analysis. The end product of this arbitrary oil tax cut has cost the state $235,530,746 to date according to Tax Department figures.
First, a quick refresher on how the oil extraction tax works. There are two separate components at play here. First, the tax rate itself, which was established by North Dakota voters via initiated measure in November of 1980. Second, the so-called “trigger,” which was a provision to automatically lower the voter-approved rate when the price of oil stayed below a specific dollar amount for an extended period of time. The trigger was created by the North Dakota Legislature in 1991. The 1991 bill to create the trigger was SB 2279 and was sponsored entirely by Republican legislators. One of those sponsors was then Representative Rich Wardner, the current Senate Majority Leader from Dickinson.
The two parts to the oil extraction tax – the tax rate and the trigger – are entirely separate policy decisions. One was created by the people in 1980; the other was created by the Legislature eleven years later. Thus, illustrating that we can change one without changing the other. But, that wasn’t what happened in the final days of the 2015 legislative session.
The Republican machine, along with its public relations specialists and oil industry lobbyists, continues to manipulate the narrative regarding the decision to cut the oil extraction tax. Only now, Republican talking heads are using simplistic catch phrases developed in last year’s Presidential campaign, calling legitimate disagreements over tax policy “fake news.” To state firmly that the tax rate and the separate trigger must be acted upon at the same time with the same legislative action is patently false. Those who claim otherwise are practicing the art of saying anything while knowing nothing.
Yes, eliminating the trigger prevented a huge revenue loss. But every legislator – Republican and Democrat – along with every policy expert I know of agreed the trigger should be eliminated. On the other hand, following the elimination of the trigger with a controversial decision to permanently cut the oil extraction tax rate from 6.5% to 5% without question caused loss of revenue. Of course the averted revenue loss from eliminating the trigger is bigger than the loss from the cut to the tax rate, at least in the short term. But, lumping these two separate policy decisions together is spin at best and dishonest at worst.
By their own admission, the Republican’s decision to cut the extraction tax rate would bring in less revenue for the state. As a sponsor of the 2015 bill, Senate Majority Leader Rich Wardner – the same Rich Wardner who created the trigger in 1991 – admitted it on record during the Senate Finance and Tax hearing on April 21st, 2015. When giving his testimony in support of the oil tax cut, Wardner had this to say:
If everything were the same, the revenue under the new tax rate would put less money into the oil tax buckets. – Senate Majority Leader Rich Wardner (R – Dickinson)
“If everything were the same” i.e. keeping the rate at 6.5% while also eliminating the trigger, we’d have maintained $235,530,756 in revenue according to the Republican-controlled Tax Department. That scenario is one of the alternatives offered by Democratic lawmakers not once, but twice in 2015. It was also offered in 2013 by Democrats.
All attempts by Democrats to simply remove the trigger were rejected by the Republicans.
(BELOW): A month-to-month breakdown of what each proposal would offer in tax collections. The blue bar shows what the state would have collected if lawmakers simply eliminated the trigger without cutting the tax rate.
(BELOW): A cumulative chart since January of 2016. This chart includes the third bar without the tax cut passed by Republicans which has been “conveniently” left out by others.
It never was a take-it-or-leave-it in 2015 as Republicans would like you to believe. Their political decision to couple the elimination of the trigger with a reduction in the tax rate itself was a decision made behind closed doors. Not only did Democrats offer a plan to eliminate the trigger while leaving the tax rate untouched, they also wanted to study what the most effective oil tax rate would be. The purpose of the study: at what rate would we be able to maintain our budget priorities while also satisfying economic growth?
I don’t think that this bill has not been thought out. YOU (Rep. Mitskog, D – Wahpeton) have maybe not been part of these discussions, but I have. It has been thought out for awhile now. – Rep. Craig Headland (R – Montpelier)
Instead, the Republicans insisted on an arbitrary cut to the tax rate for purely political reasons. It is important to note their original wish was to cut the rate from 6.5% to 4.5%. They settled for 5% based on nothing more than wanting to cut taxes for oil companies. Rep. Tom Kading said as much in the House Finance and Tax meeting when he said any change to the trigger without lowering the tax rate would not pass the House Chamber. Politics, not prudent policy decisions, ruled the five days this bill was debated at the end of the 2015 legislative session.
Go through the minutes. It was repeatedly asked what Republicans were basing their decision to cut the oil extraction tax on. Nobody – not Al Carlson, not Rich Wardner, not Craig Headland, not Dwight Cook – not a single one of them could provide a coherent answer as to why they wanted to cut the oil extraction tax rate. That’s because no study or prior-analysis was conducted to determine what the most effective extraction tax rate would be. Remember, the rate of 6.5% at the time brought us to being the second largest oil producing state in the nation.
The false narrative that the only options were to go along with the Republican tax cut or maintain the status quo and have zero tax revenue while the trigger was on simply isn’t true. Blindsided with the 11th-hour oil tax bill left people scrambling. Nobody in the Republican majority would express the full impact of this permanent cut in the tax rate. Perhaps it was either because they didn’t know the impact of their decision, or maybe they just didn’t want you to know.
We continue to see people paint a false narrative by omitting information relevant to having an open, honest debate. The bottom line is that this was a politically motivated tax cut. It produced a lower tax rate not based on research, but on what was politically popular to do at the time for campaign donors and special interests. Because of the partisan decision to cut the oil extraction tax in 2015, vital services and tax rates for living, breathing North Dakotans are being impacted. In our upcoming series, you will learn exactly how this impacts you.