StateImpact Oklahoma
8:36 am
Wed July 30, 2014

In Lawsuit Over Oil And Gas Tax Law, Two Ways To ‘Test’ A Revenue Bill In Oklahoma

The State Supreme Court on July 29 heard a lawsuit and constitutional challenge to House Bill 2562, a measure that would change the effective state tax rate levied on oil and gas production.

Both parties agreed that the measure was written to reduce taxes, but is HB 2562 a “revenue bill?” That definition is important because this court battle isn’t about policy, it’s about procedure.

For 20 years, oil and gas production from horizontally drilled wells has been eligible for a tax break that reduces the top rate of 7 percent to just 1 percent.

This incentive was written when horizontal drilling was new and novel. But today horizontal drilling is mainstream and has fueled much of Oklahoma’s oil boom. As Oklahoma’s oil field has boomed, so, too have the cost of these tax incentives.

The drilling incentive expires next year, so Republican lawmakers and the energy industry worked during the 2014 legislative session to write a replacement — HB 2562, which sets the incentived tax rate at 2 percent for the first three years of production. The new bill, authored by House Speaker Jeff Hickman, R-Fairview, also extends the tax cut to vertical wells.

Oklahoma City attorney and legislative watchdog Jerry Fent, who has successfully challenged legislation in the past, filed a lawsuit in June to invalidate the law, just weeks after it was signed by Gov. Mary Fallin.

Court Hearing

At the July 29 Supreme Court hearing, Fent argued that because the bill changes tax rates that fund state government, the court should consider it a “revenue bill,” which requires extra legislative procedures.

Voters added those extra legislative procedures to the constitution in 1992. The statute requires, among other things, that revenue bills receive a three-fourths vote in the House and Senate, and that such bills cannot be filed during the last week of session.

House Bill 2562 failed to meet those tests, but the State of Oklahoma argues the bill isn’t unconstitutional because it’s not a revenue bill.

Representing the state, Solicitor General Patrick Wyrick argued to a Supreme Court referee that the court should focus on the motivation of the lawmakers who authored the bill. Since the intent of the legislation was to avoid tax increases and stimulate the economy, the measure shouldn’t be considered a “revenue bill,” Wyrick argued.

But Fent argued that such a test is too subjective to be considered by the court. It’s a “social test,” not a “legal test,” he told the court referee. Fent says that if the court sides with the state and affirms the law, lawmakers could even use the economic stimulation argument to raise taxes one day.

“Does it stimulate the economy to tax 99 percent of my income or capital gains,” Fent asked?

Questions From The Court

The court referee, Daniel Karim, only asked a few questions at the hearing. He asked Wyrick if the Legislature could fix the issue during next year’s session.

A lawyer for the Oklahoma Independent Petroleum Association, which filed a brief in support of the state, said such a delay would hurt the state’s oil and gas industry because energy companies are already planning where they might drill next year.

The referee will write a report to give Oklahoma’s Supreme Court Justices. The court can agree with the report when it makes its ruling, or the justices can craft their own response or call for another hearing. If the court rules broadly, Fent says the case could create a domino effect that impacts legislation enacted years ago.

“Since 1992 there were 13 different revenue bills, then a person could file a class action and go back to those and have the money returned,” Fent said after the hearing.

If Fent’s lawsuit does prevail, Solicitor Wyrick, the state’s attorney, implored justices not to make its ruling retroactive.

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