Oil and gas taxes creating windfall for high-producing states

Increasing oil and gas production has led to a considerable financial boon for a number of states.

This blog has previously talked at length about the many economic benefits associated with expanding oil and gas production in the United States. In a recent article, Pew's Stateline publication highlighted one of the key advantages that drilling booms have brought to states in recent years: a new source of financial support for the public sector.

In addition to taxing extraction activities, states also receive money from royalties and leases. In many jurisdictions, lawmakers have arranged to funnel these revenues into special funds that support education or other priorities.

North Dakota's experiences in the past few years illustrate just how successful this strategy can be. The state's Legacy Fund has significantly exceeded expectations as a result of the ongoing drilling boom in the Bakken shale, taking in a record-breaking $92 million in July.

"It is growing very fast," Governor Jack Dalrymple said during an interview with Stateline. "It's going to become much bigger."

By the time lawmakers begin making definite plans for how to spend the money in 2017, the fund could contain more than $3 billion. Any use of principal will require the support of two thirds of both houses of congress and will be limited to 15 percent during each two-year budget cycle.

States use oil and gas revenue for different purposes

Stateline contributors Stephen Fehr and Melissa Maynard noted that Alaska's Permanent Fund, which currently holds about $45 billion, is the largest in the nation. It is also well known because it pays cash dividends to the state's residents on an annual basis. Last year, each Alaskan received almost $900 from the fund.

Texas uses the proceeds from oil and gas production that takes place on public lands to support its higher education system. The state's Permanent University Fund is the oldest such account—it was established in 1876 and contains roughly $14 billion today. Wyoming also dedicates some of the cash in its Permanent Fund to provide scholarships to the state's colleges and universities.

New Mexico has approximately $11 billion in its Severance Tax Permanent Fund, which is primarily used to pay down interest and principal on state-issued bonds.

Seeing the benefits that these funds have brought in other areas, new states are looking to form their own. In 2012, voters in Utah approved a ballot initiative calling on the state government to begin putting a portion of revenues from oil and gas production into a special trust fund, rather  than the general fund, in 2016.

Democrats and Republicans agree: It's just 'a good idea to save money'

Lawmakers in West Virginia also seem to be interested in establishing an account. Earlier this year, the legislature sent a delegation headed by Senate President Jeff Kessler to North Dakota to learn about the state's successful Legacy Fund. In an interview with the Charleston Gazette, Kessler indicated that he believes the proposal will attract "broad support" from members of both parties.

"I don't think it's liberal or conservative for folks to say it's a good idea to save money," Kessler said.

The Gazette also spoke to state Senator Dave Sypolt, who said the trip to North Dakota had helped shine a light on some of the potential pitfalls that West Virginia would need to avoid. Specifically, he wants there to be ironclad assurances that the money deposited in the fund will not be drawn down to cover discretionary spending when budgets get tight. In his view, the best way to accomplish this is by creating the fund through a constitutional amendment.

"First of all, it makes it more permanent so it's less likely to be defunded or changed in the near future, and second of all, it makes the participation of the citizens paramount, they must go to the ballots and approve it," Sypolt explained.

Kessler indicated that he is open to using the amendment process to create a fund, but said he wanted to learn more about the arrangements that have been made by different states and discuss the issue further with his colleagues in the West Virginia legislature.

West Virginia Oil and Natural Gas Association Executive Director Corky DeMarco also made the trip to North Dakota. He cautioned that state lawmakers should not get ahead of themselves after seeing the dramatic growth of North Dakota's fund, as the state's oil production is roughly 100 times that of West Virginia's. At the same time, he expressed tacit support for the idea of creating a special fund for revenues from oil and gas production.

"From the standpoint of what we can leave for our children and our grandchildren in West Virginia, we need to think about this," DeMarco said.

Deployment of new technologies will aid states in maintaining gains

There are many states that have the option to fund education and other priorities using cash generated by the energy industry. However, to ensure that all stakeholders are able to reap ongoing benefits from drilling projects in their states, producers will need to maintain efficiency by keeping their equipment up to date.

Hydraulic jet pumps have emerged as one of the most useful assets available to well operators, thanks to their high level of versatility. The unit's unique design allows it to be deployed in straight, horizontal or deviated wells and although the lack of downhole moving parts ensures maintenance needs are minimal, the jet pump can be easily retrieved for optimization or repair through manipulation of surface valves and reverse circulation of fluid.