Endless Holiday

By Bob Decker
February 17, 2009

The oil and gas industry has enjoyed 30 years of receiving tax breaks from the Montana Legislature (see list of significant bills here). The most generous reduction occurred in 1999, when the Legislature passed and Gov. Marc Racicot signed into law legislation that both reduced basic severance tax rates on oil and gas production and enacted “holiday,” i.e., discounted, tax rates for new wells.

As a result of the 1999 largesse, state and oil- and gas-producing counties in Montana
lost a fortune in tax revenue (translation: other Montana taxpayers ended up covering the loss or public services provided by the state were decreased, or both). According to data produced by the Montana Department of Revenue, state and county tax revenue lost from 2002-2008 totaled more than $600 million.

An oil and gas tax “holiday” is a period of time (currently 12-18 months in Montana) in which tax rates on oil and gas production are discounted from the usual tax rate. The application of the holiday idea is not unique to Montana, nor did it begin in Montana with the 1999 legislation. Research at The Policy Institute found that Montana’s use of the holiday dates to at least 1979, when discount tax rates were given to natural gas wells drilled to depths of 5,000 feet or more, at the time a far stretch of technological capacity.

The rationale for giving tax breaks to the oil and gas industry has been based on the notion of providing incentive to the industry when market prices for oil and gas are low. With that in mind, most holiday and other tax breaks given to the industry in the 1980s and early 1990s were accompanied by price trigger points that, when reached, reverted tax rates to the basic level. Thus, the incentive of lower tax rates was applicable only when market prices were low; when the prices rose to a respectable level, the incentive ended.

The 1999 legislation that enacted new holiday rates dropped the price trigger provision, with the effect the holiday/incentive stayed in place no matter the price. Well, the rest is sad history: after a couple of years of little movement, oil and gas prices started climbing in 2002 and didn’t look down until 2008, about the time the global economic meltdown began in earnest. Even in 2008, when oil averaged $95 per barrel and natural gas $8 per thousand cubic feet, Montana’s tax holiday kept incentivizing the industry.

In this year’s session, Sen. Christine Kaufman (D-Helena) introduced SB 258, which proposes to suspend Montana’s tax holiday when oil reaches $80/bbl (and gas $7.60/MCF). Now, with oil having dropped from its $147/bbl zenith last June to current levels hovering around $40/bbl, and with a decrepit economy crushing demand for fossil fuels, Kaufmann’s bill is not likely to have effect for two, three, or more years. And had her bill been working as law during the past few years, it would have affected oil and gas taxes in one year – 2008.

Modest as Sen. Kaufmann’s SB 258 is, it was roundly opposed by oil and gas industry representatives, as well as big-business lobbies, e.g., Montana Chamber of Commerce, and commissioners from oil-producing counties, on February 12, when the bill was heard before the Senate Tax Committee.

In the House, Rep. Kendall Van Dyk (D-Billings) introduced HB 388, which reflects a proposal by Gov. Brian Schweitzer to add a surtax of $1/bbl and $0.08/MCF on oil and gas, respectively. Van Dyk’s bill proposes to utilize the revenue from the surtax, estimated at $44 million per year, to support the Quality Educator program for Montana schools.

Rep. Van Dyk’s bill was heard on February 13 by the House Education Committee. The bill was supported by the governor’s office, MEA (the state’s large teachers’ union), and The Policy Institute, and opposed by industry, the Montana Chamber of Commerce, and the Montana Taxpayers Association.

Neither the Senate Tax Committee nor the House Education Committee acted on the respective bills.