Eliminating the Montana oil tax holiday -- a bad idea whose time hasn't come

As has been discussed in these pages before, one of the things that the state of Montana is doing right when it comes to developing our oil and gas resources is the 18 month "tax holiday" that Montana grants on newly drilled wells. Because of it, our overall tax structure is reasonably competitive.

There are other ways to make taxes competitive, such as lowering rates across the board, but the "tax holiday" is a reasonable approach, because it allows oil production companies to more quickly recoup the millions of dollars that have to be spent to drill a well. Given that wells produce for decades, there are plenty of taxes to be collected over the life of a well, so Montana tax collectors get theirs in the long run.

In a recent guest editorial, former Democratic state senator Tom Towe (interestingly, the Billings Gazette neglects to mention his party affiliation -- something the editors seem never to fail to do when Republicans write guest pieces) starts out with a very reasonable discussion of problems that oil patch communities face because of stress placed on their infrastructure.

We have discussed these problems here, as well, because they are real. Towe correctly notes that it would be relatively simply to direct more oil tax revenues to cities affected by oil development. But he inexplicably switches topics halfway through the editorial and claims that the best way to come up with the money would be to eliminate the "tax holiday." Maybe I'm missing something, but the argument seems like a non sequitur.

According to Towe, the state of Montana takes 46% of oil tax revenues for the general fund, while directing 54% of it to local governments -- but not, apparently, to city governments.

The 54% figure, incidentally, seems high -- if, as Towe, says, oil revenues were $210 million in 2010, did local governments really receive in excess of $110 million? In any event, if more money is needed to help city governments deal with law enforcement, infrastructure, street building and repair, etc., then it would seem that the logical answer is quite simple, and requires no revamping of tax law or elimination of tax holidays: just leave more of the money in the local communities and have the state grab less of it to spend in Helena.

I somehow suspect that if the oil "tax holiday" were to be eliminated and Democrats were in charge, eastern Montana wouldn't get the increased revenue. How do I know this? Just a guess. A little of it might trickle down to city governments in Sidney and Glendive, but most of it would get spent on projects in western Montana -- not to mention on hiring more government employees in Helena.

With solid Republican majorities in Helena, the idea of lifting the tax holiday isn't going anywhere in the coming legislative session, but it is loose talk like this that makes Montana a less than safe and friendly place to produce oil. In either North Dakota or Wyoming, producers can expect a long-term stable tax environment. In Montana, the situation is never more than 2 years away from radical change for the worse, and that can't make us look attractive.

As mentioned at the beginning of this post, there are more ways than one to make taxes competitive. If Democrats were to come up with a revenue-neutral way to lower tax rates while eliminating the 18 month oil and gas tax holiday, they might well be able to work with Republicans to establish a lasting bipartisan oil and gas tax policy. I doubt we will see any such common-sense proposals, but one can always hope.