Arguments heat up in lawsuit over oil and gas tax rate

Oklahoma City attorney Jerry Fent filed suit in June challenging House Bill 2562.

Fent, who has successfully challenged a number of laws, alleges the measure is a revenue bill. As such, it must secure three-fourths support in the Legislature, which it did not, he alleges.

His suit also alleges it is unconstitutional because revenue measures can’t be passed during the last week of the legislative session, which this one was.

The measure provides for a 2 percent tax rate for all new oil and gas wells for 36 months of production. It applies to vertical and horizontal wells.

It increases the rate from 1 percent, which had only been applied to horizontal wells. The old rate was set to expire July 1, 2015, resulting in an increase to 7 percent.

A hearing before an Oklahoma Supreme Court referee is set for 10:30 a.m. Tuesday. Gov. Mary Fallin and the state are named as defendants.

The suit has generated interest from various factions, including the Oklahoma Oil and Gas Association, one of the oldest oil and gas industry associations in the country.

The goal of the measure is to provide an economic incentive for the industry to drill more wells, according to the association’s brief, adding that it was not a revenue bill.

“When the producer in question conducts operations in multiple states, the varying impact of each state’s production tax rates will truly impact the estimated profitability of the potential new wells for each state, giving the state with the lower tax rates an advantage over states with higher rates, if the other considerations are roughly equal,” the association’s brief said.

The Oklahoma Independent Petroleum Association, a nonprofit corporation with more than 2,500 members, argued that the measure is a production incentive and not a revenue bill.

“The principal purpose of a tax incentive is to encourage desired activity and not to raise revenue,” according to a brief the petroleum association filed in the case.

Courts have said tax incentives and credits are valid legislative tools to stimulate production, the brief said.

Steven Dow, executive director of the nonprofit CAP Tulsa, also filed a brief in the case. He is a former member of the Oklahoma Commission for Human Services and one of five members of the Oklahoma Department of Human Services Family and Children Advisory Committee.

His brief supports Fent’s position that the measure is unconstitutional.

The measure imposes a tax, the brief said.

“The primary purpose for collection of gross production revenues is to fund government services,” Dow’s brief states.

Oklahoma Attorney General Scott Pruitt’s office is representing the governor and the state.

In its brief, it said the constitutional provisions at issue were designed to protect the people from tax increases.

“It makes little sense to apply this protection to instances where the Legislature is attempting to stimulate the economy by reducing tax rates,” Pruitt’s brief said.