In its infinite wisdom (OK, I'm kidding just a little here), the Texas Legislature showed great foresight during its 1981 session, creating what the state calls the Texas Economic Stabilization Fund but what has since come to be commonly known as the Rainy Day Fund. At the time, policymakers took advantage of a great boom time in the petroleum industry, using the state's oil and gas severance tax receipts as the funding source for virtually the entire fund balance.
Over the last 36 years, the Rainy Day Fund has proved to be exactly what it was billed to be back in 1981: a fund that has had the effect of stabilizing the state's budget situation. As an example, the Great Recession created huge revenue shortfalls for the state government going into both the 2009 and 2011 legislative sessions, forcing policymakers to cut spending on state services deeply. But the ability to take billions of dollars from the Rainy Day Fund ensured that cuts to the bone did not become cuts into the marrow of those services.
The Rainy Day Fund has also allowed legislators to address other pressing state issues without impacting the budget's General Fund. The 2013 session of the legislature funded the state's entire $50 billion State Water Plan by tapping the Rainy Day Fund for $2 billion, establishing a revolving line of credit that will be used to finance a large variety of dams and other water projects in the coming decades. That same session also, with the approval of the state's voters, tapped the Rainy Day Fund for $2.25 billion to fund much-needed road improvement projects all over Texas.
Even after all those and other large, special withdrawals over the last decade, the Rainy Day Fund today retains a balance of over $10 billion, money that is available to help Houston and other areas of Southeast Texas rebuild from Hurricane Harvey. In short, the Texas Rainy Day Fund is a pretty phenomenal success story for which the oil and gas industry rarely receives much credit.
Things are not looking so positive for the legislature up in Oklahoma, despite the gigantic contributions taxes and royalties collected from oil and gas development make to the state’s budget. Oklahoma’s state government is far more reliant on oil and gas-generated income than Texas and has not chosen to create a rainy day fund during any of the industry's recent boom times. Thus, the recent downturn in the industry has helped to create what is becoming an intractable issue in balancing the state's budget.
For the second time in the last three years, the state’s Legislature resorted to raising taxes on the industry during its regular session this year. In 2015, the Legislature raised taxes by eliminating and modifying several incentives that existed under the state’s gross production tax (GPT), and implementing a two-tiered rate under the GPT. Those incentives had been put in place over the previous decade in efforts to attract capital investment to the state.
This year, the Legislature went even further, eliminating other incentives that had remained on the books and raising the GPT rate for a large number of wells. Despite this second tax increase in just three years, legislative leaders could not commit to industry representatives that they would not be coming back again in 2018 looking for even more taxes on the industry, since projections indicate it will face another large deficit when the Legislature convenes again next January.
In spite of these increases in oil and gas taxation, and other tax increases and spending cuts enacted earlier this year, the Oklahoma legislature finds itself back in special session today, still trying to balance the state's budget after a judge ruled a cigarette tax increase to be unconstitutional.
While it is perfectly understandable that tax rates and incentive programs related to any industry are going to change from time to time, the constant monkeying around with the GPT is beginning to reduce companies’ ability to properly plan their drilling programs and other business activities in Oklahoma. For companies who allocate huge drilling budgets between projects in multiple states, predictability is a very important factor. These budgets are allocated mainly based on an anticipated rate of return on capital basis, and a constantly shifting tax burden reduces the willingness of companies to commit the millions of dollars needed to explore for and develop oil and gas resources.
Oklahoma is very fortunate to be the home to the SCOOP and STACK play area, one of the truly world-class oil and gas plays in the United States. It would be a shame if the constantly shifting tax goal posts by the Legislature end up negatively impacting future investments in that resource. Another effort to raise the GPT during this special session, or in the 2018 regular session could do just that.
Engaging in hindsight is easy and often unfair, but in this case, not so much. There is no question the existence of the Rainy Day Fund has made a huge difference in the stability of Texas's state government and economy, and that policymakers in other states wish they had a similar tool at their disposal today.
