Oklahoma is currently enjoying a period of exceptionally strong revenue growth.
As we near the end of FY 2019, General Revenue collections have already come in $360 million ahead of the year’s estimate, which will ensure a large end-of-year deposit to the Rainy Day Fund. Next year’s revenues collections are projected to be more than 20% higher than last year’s, which has allowed the Legislature to approve two straight years of substantial funding increases.
Much of the credit for the prosperous fiscal situation is due to rising oil and gas revenues. In recent sessions the Legislature curbed tax breaks for the oil and gas industry that had allowed a growing share of production to be taxed far below the standard 7% rate. Until 2017, some older wells were taxed at just 1% during their first three years of production while new wells were taxed at just 2% for three years. In 2017, the Legislature restored the rate for all existing wells to 7% and then in 2018 restored the rate on new wells to 5% for the first 36 months.
Some in the oil and gas industry warned lawmakers that higher tax rates would stifle production and harm the energy industry and overall state economy. This has not appeared to be the case. Oil and gas production is currently at all-time highs in Oklahoma as well as nationally. Over the 12-month period through February 2019, Oklahoma oil production averaged 17 million barrels, which is 30% higher than during the peak years of the early 1980s.
The restored tax rates and growth in production have given state revenues a significant boost. Through April, gross production tax (GPT) revenues to the General Revenue Fund are at $584 million, which is 132% above last year. The higher tax rate, which took effect in September, accounted for $260 million in increased GPT revenue through April, according to data from the State Treasurer’s Office. Total GPT collections are 38% higher this year than they would have been had lawmakers not boosted the rate from 2% to 5%. We do not have data to determine the impact of restoring the 7% rate on older wells on revenue collections, but it is likely substantial.
The FY 2020 budget approved by the Legislature appropriated $7.999 billion across state government, $434 million (5.7%) above the original budget for FY ‘19. In addition, lawmakers set aside $200 million for the Revenue Stabilization Fund. Of the roughly $600 million in growth revenue for the FY 2020 budget, at least one-third is due to increased gross production tax collections.
Oil and gas taxes are an especially volatile revenue source, and there is good reason to be concerned about the state’s vulnerability to future drops in collections. However, the state has created a safeguard in the Revenue Stabilization Fund, which received a $200 million deposit this year and will likely grow by at least $200 million more in FY 2021.
Strong oil and gas tax collections, due in substantial part to lawmakers’ willingness in 2017 and 2018 to restore the gross production tax to higher rates, are a major contributor to the state’s fiscal health.
They are resulting in a large anticipated deposit to the Rainy Day Fund as well as significant funding increases and increased savings as part of the FY 2020 budget.