KGOU

Expensive Battle Likely if Oil, Gas Tax Hike Goes to Voters

Nov 6, 2017

The battle over Oklahoma’s tax on oil and gas production could soon spread outside the State Capitol to dinner conversations and public debates across the state.

A group of small oil and gas producers said despite recent efforts in the Legislature to raise the gross production tax temporarily to 7 percent on some wells, it will forge ahead with trying to put a state question on the 2018 ballot that would set a permanent 7 percent tax on all wells.

The group, Restore Oklahoma Now Inc., announced the effort more than a week ago and said the money would go toward teacher pay raises and alleviating a teacher shortage.

But the plan to bypass the Republican-controlled Legislature, which has resisted raising rates for new drilling activity, likely would face significant challenges.

First are the logistical and legal obstacles to getting the question on the ballot. Beyond that is a probable campaign dogfight that political insiders and advocacy groups say could be one of the one of the most expensive in modern history for a state question.

“I know these guys, and you are talking about an oil and gas lobby with almost unlimited money to spend,” said Mickey Thompson, executive director of Restore Oklahoma Now and former head of the Oklahoma Independent Petroleum Association.

The Oklahoma Energy Producers Alliance, a coalition of small oil producers that favor the flat 7 percent rate, announced Oct. 26 that it hired Thompson to lead Restore Oklahoma Now, which is in the process of registering as a nonprofit.

The move came after the failure of repeated Democratic-led legislative attempts to raise the state’s gross production tax rate. The issue did not even get a vote on the House floor during the special session, which is heading into its seventh week.

The only proposal still alive is one to raise rates on “legacy wells” – those drilled between July 1, 2011, and June 30, 2015 – from 4 percent to 7 percent. That move could generate about $150 million over the next year and is tied to a $1,000 teacher pay raise bill. But the prospects for passage are uncertain, as the House and Senate have failed to agree on a final funding package.

Even if the measure passes, Thompson said, it won’t change the group’s plans because it is unlikely to produce significant revenue after 2019.

Thompson said the Legislature’s inaction on approving long-term change to energy taxation policies proves that the ballot box is the most viable way to increase the tax to the historic 7 percent rate. The Oklahoma Tax Commission predicts the change would bring in $288 million annually.

“This has been stewing for at least a year,” Thompson said. “But the frustration really culminated with what has happened during the special session.”

What the Polls Say

Thompson said he is confident voters will rally behind the increase and poll numbers bear that out.

The Oklahoma Energy Producers Alliance commissioned a poll of 503 likely voters in late August, conducted by the Oklahoma City firm WPA Intelligence. The poll showed that 67 percent supported increasing the rate to 7 percent, with 25 percent opposed and the rest undecided.

That tracks with a poll of 400 voters conducted a month later by the Global Strategy Group for the advocacy group Oklahoma Policy Institute. The poll found that 55 percent favored the 7 percent rate, with 39 percent wanting to keep the current rate at 2 percent for the first 36 months and then 7 percent afterward.  

But Pat McFerron, president of Cole Hargrave Snodgrass & Associates, reported different results in September. His firm conducted a poll of 500 likely voters that found 52 percent agree raising taxes on the oil and gas industry hurts jobs and the state’s economy. It also found that 81 percent agree it’s important for Oklahoma to create a business climate for oil and gas that allows for growth.

“In the polling I’ve done, it all depends on how the polling is worded,” he said. “If you say Oklahoma has the lowest tax in the region and money will be used only for teacher pay, it could be as high as 66 percent, or it could be as low as 23 percent if you say it will hurt jobs.”

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McFerron said it is common for tax increases to poll better well in advance of Election Day. As more money is spent on the campaign and more people learn of the potential consequences, more voters are scared off.

He pointed to State Question 744 in 2010, which would have tied public education funding to the per-pupil average of neighboring states, as well as last year’s State Question 779, which would have added a 1-percent sales tax to pay for education initiatives. Both polled well in early stages but ultimately were defeated.

Amber England, who led the SQ 779 campaign as head of Stand for Children Oklahoma, agreed that support can fall.

She said support for the ballot measure was polling at 63 percent more than a week before the election.

Her side outspent the opposition, about $7 million to $1 million, but modest spending by opponents closer to election day likely swayed many voters, she said.

“I think that shows how incredibly important for this group it will be to make certain their language is tight enough to earn the trust of the voters,” she said.

Thompson acknowledged that although the oil-and-gas tax proposal is popular now, it might not be after millions are spent by oil and gas interests to defeat it.

“I’m certain that if the election was today, it would easily pass,” he said. “But I also know a lot can happen in a year.”

Tim Wigley, president of the Oklahoma Independent Petroleum Association, said he, too, thinks public opinion will shift when voters better understand the proposal’s implications.

He said voters will see that the higher tax rate won’t just impact big multinational energy firms, but also smaller producers.

“I work for 2,300 energy producers in some shape or form, and the average firm employs 11 people,” Wigley said. “When I talk to them, none of them think raising the rate to 7 percent would be good for the industry.”

A Deep-Pockets Duel

Thompson said his group’s $3 million fundraising target is a “realistic goal” that can at least set the framework for a statewide campaign.

But he has no doubt that major oil and gas firms such as Devon Energy and Chesapeake Energy will easily beat that amount.

“You’re talking about a proposition that could cost them about a half billion dollars (over multiple years) so, Lord no, we can’t compete with them,” he said. “But we know we are going to have to rely on a lot of grassroots and social media –  that type of thing.”

McFerron said spending on a production-tax ballot question could at least rival the amount spent on the 2001 right-to-work state question. England predicted it would be the most expensive ballot initiative in the state’s history.

Lending support to their views is what happened in other states when ballot proposals emerged that would affect the oil and gas industry.

In Alaska, opponents of a 2014 ballot measure to repeal oil and gas tax breaks spent more than $13.7 million spent during the state’s campaign. That included more than $3.5 million each from BP Exploration, ExxonMobil and ConocoPhillips.

In Colorado, the oil industry spent millions in 2016 to block from the ballot a pair of questions proposing to add oil and gas drilling regulations and allow counties to ban hydraulic fracking. The effort succeeded.

Supporters of a 7-percent production tax in Oklahoma also could spend big.

Thompson said his group has $700,000 in verbal commitments from Oklahomans who are concerned about the state’s budget situation. He declined to name any of the parties.

He also said he hopes to partner with educational and other groups that have called for higher oil and gas taxes. Last year, education advocates were willing to spend millions to push a tax that would fund long-awaited teacher pay raises.

England said her group is waiting until after the special session to decide whether to endorse the campaign, but added it is “an intriguing idea” that should resonate with voters.

Wigley, of the Oklahoma Independent Petroleum Association, said he also expects a well-funded campaign on both sides. He closely watched Colorado’s proposal when he was with the Western Energy Alliance and predicts a lot of money from out-of-state environmental advocates would flow in to Oklahoma.

“They’ll put out press releases sounding to be like regular Oklahomans,” he said. “But their only real goal is to keep more oil in the ground.”

Making the Ballot

Before any of the campaigns can start in full, organizers must get the question on the ballot – a difficult task that could sink the effort before it really begins.

An initiative for a constitutional change, which is what the Oklahoma Energy Producers Alliance is seeking for now, requires that the number of approved signatures equal 15 percent of total votes cast in the last gubernatorial election.

That translates into 123,725 signatures from registered voters, and state law requires those to be collected within a 90-day circulation period.

Thompson said Restore Oklahoma Now has retained legal help, but the group still must draft the language and overcome the expected legal challenges.

England said, based on her experience, supporters can expect all possible legal tactics to delay or attack the measure as drafted. Supporters might even have to take legal action themselves, such as challenging how the attorney general crafts the ballot language, she said.

Thompson said he hopes to overcome the legal hurdles and begin collecting signatures in about seven months. That would mean a collection period lasting running from June to August, which would leave a small window to get on the ballot. State law requires that signatures be submitted at least 60 days before next year’s general election, which is Nov. 6.

Another possible complication is that the Legislature has the 2018 session to pass a gross production tax hike or find a new way to fund teacher raises, either of which could undermine the ballot initiative.

“If that happens, we would have to talk to our coalition, to our donors,” Thompson said. “It’s not very dramatic, but we might have to hit pause.”