The NCSL Blog

11

By Riley Majeune-Fagan

Since June 2014, U.S. crude oil prices have dropped from a high of $105 per barrel to a low of just over $30 per barrel in December 2015, according to the U.S. Energy Information Administration.

Brent Crude, the leading price beDrilling rigsnchmark for light sweet crude oil, is currently trading at just under $40 a barrel.

While lower fuel prices are good for U.S. consumers—they have extra money to spend or save elsewhere—and oil and gas production makes up less than 2 percent of the national gross domestic product (GDP), states in which energy production is a larger portion of the local economy have suffered.

State revenues largely depend on economic activity and the flow of money through the economy. When a state’s economic output is dominated by one type of economic activity, the state’s revenue is tied to the fortunes of that industry. Several states have significant oil and gas sectors. In Alaska, North Dakota, Oklahoma, and Texas, oil and gas extraction comprise between 6.4 and 22.1 percent of state GDP, or an average of 12.9 percent. This is significantly more than the 1.8 percent average across the nation.

Each of these states imposes a severance tax—a tax on the extraction of non-renewable natural resources—and each state relies upon the tax to a varying degree. In FY 2014, oil related taxes made up almost three quarters of Alaska’s state tax revenue. The state has seen an almost 90 percent drop in oil dependent tax revenue over the past two years. Alaska now faces a $4.1 billion shortfall, and Standard & Poor’s lowered Alaska's general obligation debt rating from AAA to AA+.

Part of the trouble has been that states, Alaska included, overestimated the price of oil for their fiscal year projections. Alaska Governor Bill Walker wants to considerably change the fiscal landscape of the state, most notably by implementing an income tax. He has also proposed tobacco, alcohol and fuel taxes, as well as reducing the dividend check that Alaskans receive each year.

In Oklahoma, difficulty estimating revenue led the secretary of finance to declare a revenue failure. This occurs when collections in the General Revenue Fund fall below 95 percent of the estimate. As a result, Oklahoma will reduce agency spending by an average of 18 percent for the remainder of the fiscal year. While the severance tax is a large part of the trouble, it is important to understand that a down industry has ripple effects across the economy and state coffers.

All states examined in this post—except Texas—have seen a net decrease in employment over the past year. For example, Oklahoma has seen a percentage change of -0.7 percent, while the U.S. as a whole has seen a positive 1.7 percent change. With decreased employment, income tax revenue may be less. Additionally, those without wages—or lowered wages—generally spend less, which can lead to a decrease in sales tax collections. These changes have added up to the roughly $1.3 billion budget gap that Oklahoma now faces.

Many states, including Oklahoma, have created rainy day funds to deal with fluctuations in the energy market. During boom times, extra revenue is deposited into the fund to be withdrawn during bust cycles. North Dakota, facing a $1 billion budget shortfall in the current biennium, withdrew $497 million from its Budget Stabilization Fund in February, leaving only $75 million left in the fund. The state also created the Legacy Fund with oil and gas revenues, which topped $3.4 billion as of February 2016. However, by law the state cannot spend money from this fund until June 30, 2017. Policymakers will need to weigh choices between reducing spending—and services—and over-depleting funds that might be needed in the future.

Texas has faced similar problems as these other states but not to the same degree, illuminating the impact of a diverse economy. While severance taxes from September 2014 to September 2015 were down by a third as compared to a year earlier, total taxes fell by only 1/10 of 1 percent. Growth in the health care, construction, and technology industries has greatly mitigated the impact of falling energy prices on state revenues.

Although oil prices have risen slightly since January 2016, states that draw a significant portion of their revenue from oil and gas extraction will face continued challenges in projecting future tax revenues, especially as many rapidly approach the 2017 fiscal year beginning in July.

Riley Majeune-Fagan is a research analyst in the Fiscal Affairs Program at NCSL.

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About the NCSL Blog

This blog offers updates on the National Conference of State Legislatures' research and training, the latest on federalism and the state legislative institution, and posts about state legislators and legislative staff. The blog is edited by NCSL staff and written primarily by NCSL's experts on public policy and the state legislative institution.