What falling oil prices will mean for state budgets

Oil prices are dropping…fast. This may be good news for drivers but not so good for a handful of states that use energy tax revenue to help fund their budgets. 

Gregory Bull/AP/File
Austin Mitchell walks away from an oil derrick outside of Williston, N.D. Lower oil prices, while good for the broader U.S. economy, are a threat to what has been a surprising and dramatic surge in oil production in the US and to drilling communities that have come to depend on oil money. (AP Photo/Gregory Bull, File)

Oil prices are dropping…fast. This may be good news for drivers but not so good for a handful of states that use energy tax revenue to help fund their budgets. It may be especially challenging for states that rely on taxes from production of shale oil that uses methods that may be practical only at high prices. It costs $60 to $70 to produce a barrel of shale oil, leaving little margin once the price of crude dropped to the $75 range in November. Of course, the success of the controversial hydrofracking method which has opened up vast new reserves is one reason oil prices are so low.

On the positive side, with gas prices at a four year low, consumers have extra money in their pockets just in time for the holiday shopping season: more shopping means more state sales tax collections. If more travelers take to the roads, those long trips will also boost motor fuel tax collections (remember, gas taxes are generally fixed, and not tied to pump prices).

Low crude oil prices also lower the costs of surface transport, both rail and truck. Unfortunately, low prices may also boost short-term consumption of fossil fuel and may make buying gas-guzzlers more attractive.

Energy states will be affected in different ways, depending in part on how well they’ve projected prices—always a risky game. Among states that rely heavily on oil severance taxes, price forecasts for the current fiscal year range from $80 to $105 per barrel, depending on when the forecast was made.

Those states that projected prices on the low end should be able to manage without having to redo their 2015 budgets. For instance, North Dakota only publishes forecasts for the biennial budget and has not updated its projections since 2012. As a result, it’s forecasting $80-a-barrel oil and has built up over $5 billion in variousreserve funds

Kansas revised its estimate this month, down to $80. Because its budget was based on the spring estimate of $85, it now expects to get about $9 million less than forecast. That’s a real problem—after large tax cuts, the state needs all the revenue it can get. Louisiana also revised the price down from $96 in May to $82 in November. This reduces energy revenues by $50 million in 2015. Other states forecast even higher prices, which could thrust their budget into disarray. Alaska, for instance, budgeted based on $105-a-barrel oil.


Date of Forecast

Price Forecast

Fiscal Year 2015 ($ per Barrel)

North Dakota December 2012 $80
Texas December 2013 $87
Alaska April 2014 $105
New Mexico August 2014 $92
Wyoming October 2014 $85
Louisiana November 2014 $82
Kansas November 2014 $80
Source: State reports (linked)

Alaska will be the big story to watch following outgoing Governor Sean Parnell’s controversial energy tax change, which escaped a repeal attempt last August. Before Parnell, Alaska used a model implemented by former Governor Sarah Palin, called the Alaska’s Clear and Equitable Share Act (ACES)–a progressive tax with a low base rate that added surtaxes pegged to the price of oil. Parnell’s More Alaska Production Act (MAPA) has a base rate of 35 percent with no price triggers and significant credits for production.

When oil prices exceed about $90, the tax rate before credits is higher under ACES than under MAPA. But at lower prices, MAPA’s 35 percent flat rate is higher. With its budget based on $105 oil, Alaska already stood to get less revenue than expected, even with the boost from MAPA.

If lower oil prices reduce investment in production, energy state economies could suffer.   Alaska, North Dakota, Texas, and Wyoming have socked away a lot of money, so their current year budgets are not in any danger. But if prices stay low and producers stop drilling new wells, the oil boom towns in North Dakota and similar states could disappear as quickly as they popped up.  Oil producers may continue to pump existing wells, but there are fewer of the high paying jobs after the pumpjack starts and shale oil production falls offquickly if new drilling doesn’t sustain it.

Energy states can survive low prices, at least for a while. But a protracted downturn could begin to eat away at state budgets even as it puts more money in consumer’s pockets.

The post What Falling Oil Prices Will Mean for State Budgets appeared first on TaxVox.

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to What falling oil prices will mean for state budgets
Read this article in
QR Code to Subscription page
Start your subscription today