Bill would remove North Dakota’s oil tax trigger; opponents worry about fiscal impact

Proponents say it creates more certainty for oil companies, but opponents say it could cost the state millions of dollars in lost revenue.

MP Craig Headland, R-Montpelier, sponsored House Bill 1286, which aims to remove the so-called trigger from the oil production tax rate. Current policy requires oil producers to pay a higher tax rate when the average price of oil hits a certain price, called a trigger. Last year, oil prices hit the trigger, resulting in North Dakota raking in an additional $135.6 million over five months of high oil prices.

Headland, chairman of the House Treasury and Taxation Committee, said that the best tax policy requires examining what certainty there is for the oil industry and helping bring capital to North Dakota to produce oil.

“[This bill]is designed to try and keep the oil companies drilling (and) producing so we have stable production levels,” Headland said. “That would in turn mean a stable revenue stream, and that’s what’s important.”

It is bad tax policy to introduce an additional tax on “an industry that we are so dependent on and that is so significant and so important to North Dakota,” Headland added.

“Is it different than when we say to a wheat farmer, ‘You know what? You’re getting $10 a bushel for your wheat, so maybe we should put some kind of tax on you. “I just don’t philosophically believe it’s good politics,” Headland said.

The trigger price is “formula driven,” state tax commissioner Brian Kroshus said, adding that the trigger price changes annually. In 2022, the trigger price was $94.69 for a barrel of West Texas Intermediate oil, a common benchmark. On June 1, oil prices reached this level in the formula, requiring producers to pay 6% oil exploration tax instead of the usual 5%. Producers also pay a gross production tax of 5%, a rate independent of price.

“This revenue collection will vary when the trigger is effective. Two main factors are the price of crude oil then for that month and then also the level of production,” Kroshus said.

This year’s trigger price for WTI crude is $115.55, Kroshus said, adding that this is “an unusual jump but a reflection of the highly inflationary environment we’ve seen both in 2022 and to date.”

“It is unlikely that the trigger will take effect again. You can never say with absolute certainty because you don’t know what the markets will do. But the bar for 2023 is significantly higher,” said Kroshus.

Headland said its bill will not remove the oil tax trigger from production on the Fort Berthold Reservation. The Mandan, Hidatsa and Arikara Nation have an oil tax deal with the governor that was signed in 2019.

MHA Chairman Mark Fox told the Tribune this week that the trigger on tribal lands has “positive opportunities” for the tribe, and he would not oppose legislation removing the trigger so long as it doesn’t affect wells on the reservation.

“When fair market prices are high for an oil company and their revenue is exponential and their profitability is well established, we need that additional revenue to offset the many costs that oil and gas-related reservations are struggling with,” Fox said . “So we think it’s a good thing for the wells on the reservation.”

If oil prices hit the trigger again, it would mean that producers on the reservation would pay a higher rate of tax on oil production than those outside of Fort Berthold. The reservation accounted for 15% of the state’s oil production as of November, the latest figures available.

North Dakota Petroleum Council President Ron Ness said the industry supports removing the trigger.

“It’s an unnecessary onerous tax. The oil industry pays a very large percentage of all of that tax revenue, so we think it’s time to remove that trigger and move forward with a flat tax,” Ness said.

Ness said removing the trigger would “hopefully spur more investment in oil and gas activities” and also bring tax breaks for some North Dakotans.

“Mineral and license holders, tens of thousands are paying this oil tax on top of oil producers,” he said. It certainly does not determine the fate of our national budget. I think those dollars are better off in the pockets of the North Dakotans who pay those taxes, or they’re reinvested by the oil industry.”

House Minority Leader Josh Boschee, D-Fargo, said the high-end trigger was a compromise during the 2015 legislative session. That year, lawmakers lowered North Dakota’s oil production tax from 6.5% to 5% and also removed a low-end trigger that allowed the industry to receive a tax break when oil prices fell below a set level. Democrats unsuccessfully tried to reintroduce the 6.5% oil exploration tax in 2019, arguing that that level was approved by voters in 1980.

“I don’t understand why we feel the need to remove (the trigger), especially when there’s such a high threshold that needs to be reached anyway,” Boschee said. “…If we continue to reduce our revenue streams and increase our reliance on oil revenues, it won’t add up in the long run…It will impact the delivery of services that they expect from our state government.”