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Lloyd Omdahl, Published January 05 2014

Omdahl: Oil gets off cheap in ND

Economists at North Dakota State University have calculated the annual economic impact of the Bakken Formation development and came up with $13 billion for 2009 – and a lot of growth has occurred since then. For a people used to dealing in thousands, and sometimes millions, talk about billions is impressive.

But our euphoric daze should not blind us to the reality of oil development.

The oil industry is not in North Dakota because it saw a state in need of an economic boost. Neither is it here because our tax revenue has always been short. And it is not here to provide new jobs and more population for a sparsely populated, semi-arid west.

The oil industry is here because it can make billions of dollars mining our resources. And let us not forget that while North Dakota is prospering from the oil development, the oil industry is profiting even more.

When oil exploration and production ceases to be profitable, the oil industry will pack up and leave us with the consequences, whatever they may be. Even though the industry is raking in billions, some oil executives are looking for a reduction in taxes.

A spokesperson for the oil industry has suggested that state taxes on oil should be cut in half. He alleged that our current tax could drive the industry to other states, e.g., Colorado or Texas, with lower taxes.

One oil executive pointed to Alaska.

“They have a very, very high tax rate that they imposed that basically stopped exploration up there,” he alleged.

Alaska did cut its taxes on the promise that it would stimulate production and result in new revenue for the state. But even in the face of this tax windfall, a BP executive conceded that they were “producing a diminishing resource.”

The suggestion to cut taxes is groundless as long as the industry continues to make billions in North Dakota. The per-barrel profit in Alaska was estimated at $28 per barrel, a rosy return when compared to only $2 in Iraq.

The truth is that the 11.5 percent tax is reasonable. It can only look unreasonable as long as we overlook the tremendous cost brought by the industry.

As enumerated last week, because of the industry, the state government has had to build and repair highways, beef up state services and provide financial support to communities crushed by the costs of medical services, law enforcement, social services, fire protection, pollution, schools, water supply and a multitude of others.

When the first severance tax of 5 percent appeared in the 1950s, it was deemed as “in lieu of property taxes.” Because there was no way to assess the value of the oil underground, we had to wait until it came to the surface to assess it.

The annual tax on commercial property in the state is around 1 percent of market value. The 11.5 percent oil tax represents 11 years of property taxes. Then that property base is gone forever.

Look at the BNSF Railway. The company pays property taxes year after year without incurring billions of dollars in public costs. That is also true about other commercial properties in North Dakota.

Meanwhile, the oil industry is paying a one-time assessment, much of which is offset by the public costs suffered by the state and its local governments. BNSF will keep paying and paying without incurring public costs.

If the oil industry is going to carry its share of the tax load, it should be assessed for all of the extra public costs it is requiring. The costs have been gobbling up about one-fourth of our oil income so our take-home money is a lot less than we think.

Compared to other properties in North Dakota, the oil industry is getting off cheap.


Omdahl is a former North Dakota lieutenant governor and a retired University of North Dakota political science teacher.