Comments: Tax Revenues Hit Hard by Downturn
Authors: Boschee Pam 
Published: August 2020

While oil- and gas-related companies slash budgets and staff and operators pull back from production and exploration, the tax coffers of US local and state governments are shrinking fast and with hard repercussions.

In North Dakota, taxes from oil and gas production in the Bakken were bringing in a whopping 53% of all tax revenue collected by the state. In March, the amount dropped by more than 50% from nearly $200 million to around $100 million.

The effect on funding for education and other social services and infrastructure is significant. For example, the state’s 2-year budget included distribution of half of the total projected revenues, nearly $5 billion, to school districts and localities where the oil is being produced, i.e., the Bakken region.

The rising unemployment rate in the state, which collects individual income taxes, will stifle budgets further. The US Bureau of Labor Statistics reported 8.5% unemployment in April, up from rates ranging from 2 to 2.4% over the previous 5 months.

North Dakota’s revenue drop pales in comparison to Texas. The state’s oil and natural gas industry paid more than $16 billion in state and local taxes and state royalties last year, which was the highest total since tracking of the amount began in 2007 by the Texas Oil & Gas Association. Its report in January showed the 2019 amount surpassed the previous record of $15.66 billion paid in 2014. As recently as 2016, the revenue was $9.44 billion, and increased to $14 billion in 2018.

During a conference call in April, the association’s President Todd Staples, said, “With production strained by prices, we may have additional bankruptcies and mergers and acquisitions as companies work to maintain a competitive [advantage]. Job growth may continue to lag further than we’ve enjoyed in recent years.”

The Texas state comptroller Glenn Hegar said in April about 54% of the state’s general revenue during the current 2-year period would come from sales taxes. Although that’s the largest share of the general revenue, oil production taxes were forecast to account for 6.1%, and natural gas production taxes another 2.7%.

In March, when the early effects of COVID-19 and the oil-price crash hit, Hegar said in a statement, “Certainly, Texas has exposure if oil prices remain depressed for a sustained period of time, and slowdowns in economic activity related to the COVID-19 outbreak could also be a headwind. We are still only 6 months into the current budget cycle, however, and it is too early to tell with certainty how current fluctuations will impact long-term economic performance and state revenues.”

However, in May, Hegar’s office reported the oil production tax in Texas generated 75% less revenue for the state than last May, and the natural gas production tax was 76% less. All said, tax revenue from all sources was about 50% less than the same month a year ago.

Cutbacks in budgets and spending extend far beyond those announced by operators and service companies soon after the oil-price drop in March. Our industry is by no means the only industry struggling and adapting. But when our industry falters, in this case during a sudden price drop combined with a pandemic, the dominoes topple quickly across related industries, individuals, governments, and society. Harnessing the freefall depends not only on the fiscal recoveries of businesses, but also on leadership in business, government, and us as individuals to build resiliency in order to weather a changed - and changing - global status over the long term.