This piece comes to us courtesy of Stateline. Stateline is a nonpartisan, nonprofit news service of the Pew Charitable Trusts that provides daily reporting and analysis on trends in state policy.
Lower gasoline prices are a great relief for motorists across the country. But for Alaska and a half-dozen other mineral-rich states, the falling price of oil is creating huge budget problems.
Alaska, Louisiana, Montana, New Mexico, North Dakota, Texas, West Virginia and Wyoming top the list of states dependent on severance taxes levied on oil and gas producers. The sharp reduction in oil prices— they fell from $96 a barrel in July to about $50 a barrel this month—has forced those states to consider raiding their rainy day funds, cutting spending or raising taxes to offset shortfalls. Most of the states are eyeing all three.
“All of the severance states are watching this very closely,” said Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers. “It’s a question of how severe the impact is. States like Alaska, Texas and North Dakota all have built up sizable reserves—rainy day funds. The question is whether they want to turn to those or not.”
While Texas produces more oil than any other state (more than 104 million barrels a month), only 9 percent of its revenues comes from severance taxes. Alaska, by contrast, produces 16 million barrels a month but gets 78 percent of its revenue from severance taxes, according to the Rockefeller Institute of Government. That is the highest percentage, by far, of any state.
“The good news for the states with the high reliance on severance taxes is that they had not been hit as hard as other states during the Great Recession,” said Lucy Dadayan, senior policy analyst at the Rockefeller Institute. “The bad news is that now they need to address the fiscal challenges created by the volatility in severance taxes.”
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In Wyoming, the state’s revenue estimating group last month revised downward anticipated revenue by $217 million, mostly due to the downturn in oil and natural gas prices. The previous forecast in October was based on an $85 a barrel oil price; last month’s price was $39 a barrel. The reduction is on top of a $4 million deficit lawmakers were confronting at the start of this year’s legislative session.
Buck McVeigh, executive director of the Wyoming Taxpayers Association, which tracks state revenues, said the state has a $2 billion rainy day fund and can weather the downturn. “We are pretty well seasoned at preparing ourselves for these types of situations,” he said.
The state has considered broadening its tax base over the years, and possibly developing a corporate or personal income tax, to avoid the volatility. McVeigh said that might make sense from an economist’s standpoint, but the state has always reverted to severance taxes.
“There’s that natural reluctance to (new taxes),” he said. “With minerals ‘you have to dance with the one that brung ya.’”
“From an outsider looking in, you’d have to say this isn’t a good model,” he added. “But if you look at the track record of this state and their fiscal policies, they are pretty darn good at it.”
