The Policy Institute, based in Helena, Montana, blends authoritative research and hands-on political engagement to create public policy based on economic justice, fair taxation, corporate accountability and environmental responsibility.

Endless Holiday?

By Bob Decker, Executive Director

September 12, 2008

A recent article in the Great Falls Tribune addressed the tax “holiday” on oil and gas production in Montana. Because that policy has an enormous impact on the state budget – and represents an enormous injustice in Montana’s tax system – the subject deserves further analysis.

The recent history of tax breaks given by the Montana Legislature to the oil and gas industry spans nearly 20 years. Between 1987 and 2005, lawmakers decreased industry taxes in various ways, from exempting new production from net proceeds taxes to lowering tax rates on stripper (i.e., declining production) wells to decreasing state severance taxes on horizontally drilled wells.

The tax breaks were typically described as “incentives,” intended to spur production during sagging oil markets. Oil sold for $34 per barrel in 1987, $21 in 1999, and $55 in 2005 (all valued in 2007 dollars).

The beneficence of lawmakers spiked in 1999, when the Republican-controlled Legislature lowered the basic production tax rate for all new wells and many old ones, then expanded the definition of stripper wells and gave them a generous discount, too.

Oil hovered around $62 per barrel in 2006, then in 2007 began its climb to $100-plus levels and a record price of $147 in June 2008.

The Montana Department of Revenue calculates that the tax breaks given to the oil and gas industry by the 1999 Legislature (and signed into law by then-Governor Marc Racicot) amounted to $515 million in lost revenue to state government and Montana counties between 2003 and 2007. That represented a 38 percent tax break for industry.

Consider it this way: If the Legislature had given Montana citizens a property tax reduction that matched the break it gave to the oil and gas industry in 1999, the owner of, say, a $150,000 home would have paid on the order of $3,000 to $4,000 less in property taxes during the past five years.

In defending the holiday, the director of the Montana Petroleum Association says that the cost of drilling – labor, fuel, metal, supplies – has gone up considerably since the 1999 tax breaks were enacted. Yes, and the rest of us suffer from the same inflationary forces. Why should the oil and gas industry get special treatment?

Defenders of tax breaks for oil and gas say that tax rates are major factors in exploration and development decisions and that incentives are needed to attract business and create jobs.

I haven’t found evidence to support that argument, but a study from the University of Wyoming concludes that tax incentives are not significant determinants of oil and gas production and that the “overall story (in reducing severance tax rates) is one of a substantial net loss in tax revenue.”

Perhaps that’s why the Wyoming legislature repealed, in 2000, the 2 percent severance tax reduction that it had given the oil industry in 1999.

And perhaps that’s why the Alaska legislature approved a major increase in taxes on the oil industry in 2007, one that raised billions of dollars and doubled revenue to the state.

If it’s right for Montana to help the oil and gas industry when prices are low, then it’s right for the industry to help Montana when prices are high. It’s up to the Legislature to revise the current tax system and restore a balance.

Until the Legislature makes a fix, the oil and gas industry remains on “holiday” in Montana and doesn't carry its load. With elections on the near horizon, it’s a good time for voters to ask their legislative candidates what they would do about it.