Gov. Mary Fallin on Wednesday signed a bill that makes permanent a generous tax incentive for new oil and gas drilling.
The controversial measure, House Bill 2562, was forged as lawmakers and energy company executives debated the appropriate tax rate for the industry, which drives much of the state’s economy. Oil and gas groups lobbied hard for the bill, as did executives from three of the state’s largest oil and gas companies, who argued the incentive would help Oklahoma compete with other states for drilling.
“The new 2 percent tax rate is fair to the state and sends a clear message to energy producers worldwide: Oklahoma is the place for energy production and investment.” Fallin said in a statement. “We want to be a leader in this field not just today but for decades to come.”
Several other high-profile energy executives, however, said taxes and incentives had little bearing on where or whether they drilled.
Under the bill, production from new oil and gas wells — both horizontally and vertically drilled — will be taxed at 2 percent for the first three years. After that, production will be taxed at 7 percent, the state’s overall gross production tax rate.
The new incentive replaces one that expires next year. The old incentive was enacted in 1994 and applied only to horizontally drilled wells — a then-experimental drilling technique that has become industry standard. The old incentive reduced taxes on horizontal wells to 1 percent for the first four years of production. Horizontal drilling’s evolution from novelty to common practice led some, including the left-leaning Oklahoma Policy Institute, to question whether it was necessary or an oil industry handout.
Republican House Speaker Jeff Hickman of Fairview was the principal author of HB 2562, and he lobbied hard for the measure’s passing. During the last week of the 2014 legislative session, Hickman defended the bill from volleys by House Democrats, who questioned both the bill’s merit and its urgency.
The bill is likely to draw a constitutional challenge from Jerry Fent, an Oklahoma City attorney who has successfully challenged legislation in the past. Fent told StateImpact HB 2562 violates several provisions of State Question 640, a voter-approved amendment that changed the constitution in 1992 to require extra legislative burden on “revenue bills.”
As amended, the Oklahoma Constitution prohibits the Legislature from passing a revenue bill during the last five days of session, and it requires that revenue bills receive a three-fourths approval from both the House and Senate. HB 2562 was signed on the second-to-last day of the 2014 session and didn’t receive three-fourths approval in both chambers — House: 61-34; Senate 30-14 — but Republican leaders say that language applies “only to bills that increase taxes,” Senate President Pro Tem Brian Bingman told The Oklahoman‘s Rick Green:
“I think we can agree to disagree,” Bingman said. “We’re actually decreasing taxes after July 1, 2015.”
Fent definitely disagrees.
“The bottom line is the bill is a revenue increase,” he told StateImpact on May 23. “It’s raising it from 1 to 2 [percent]. Then, later on, it goes to 7. I guess the courts will just have to go through that and exercise some kind of logic to it.”