ASK YOUR GOVERNMENT: Uses of North Dakota oil tax money are complex

Q. I have some questions regarding the oil wells in North Dakota. What is the oil tax money collected from each well each month used for by the state?

Is the natural gas wasted by flaring still running 20 to 30 percent, or is it being captured and piped to facilities?

- Pat Larson, Jamestown, N.D.

A. Because it will take a good amount of space to explain the complicated oil tax formula, I'll answer part of your question this week and the rest next week.

Oil companies pay the state a 6.5 percent extraction tax, as well as a 5 percent gross production tax. The state Tax Department expects to collect $2.1 billion from these taxes during the 2011-13 biennium.

The money funnels through multiple funds that benefit the state and the oil counties in different ways.

Let's start with the extraction tax because that money funnels differently than the production tax.

Thirty percent of extraction tax revenue goes to the Legacy Fund, which voters approved last year. Twenty percent goes to the Resources Trust Fund, 10 percent to the Common Schools Trust Fund and 10 percent to the Foundation Aid Stabilization Fund.

I'll explain what these funds are before I get to the remaining 30 percent of this tax revenue.

- Legacy Fund: Money in this account cannot be spent until July 1, 2017. After that, the fund's earnings will be transferred to the general fund for state spending. For principal to be spent, two-thirds of the Legislature would need to agree. Not more than 15 percent of the principal could be spent per biennium.

Supporters of this fund say oil is a one-time harvest, and revenue should be set aside to benefit future generations. At the end of October, there was $67 million in this account.

- Resources Trust Fund: This fund is for water-related projects -- including flood-control and rural water systems -- and for energy-conservation programs. At the end of October, the balance of the fund was about $120 million.

- Common Schools Trust Fund: This fund dates back to statehood, when the federal government granted North Dakota 2.5 million acres "for the support of common schools." Over time, much of this land was sold. The state still owns about 632,000 surface acres and 1.5 million mineral acres of common schools land -- some of which is now reaping lease bonuses and royalties in the oil boom.

This fund to benefit K-12 education was worth about $1.6 billion as of June 30, said Jeff Engleson of the State Land Department. Distributions are part of the school-funding formula. To determine how much is distributed, the Land Department looks at the five-year average value of the trust fund and pays out 5 percent of that amount each year. Engleson said the goal is to support multiple generations of students even after oil production ends. This biennium, $92.5 million of Common Schools Trust Fund money will be distributed to schools, an increase of 19.9 percent over the 2009-11 biennium.

- Foundation Aid Stabilization Fund: Interest from this fund is transferred to the general fund, where it can be used for any state appropriation. The principal can be spent only under the governor's order to offset foundation aid reductions to schools as a result of a revenue shortfall.

At the end of October, the balance of the fund was about $156.5 million.

What happens to the remaining 30 percent of extraction tax revenue gets more complicated.

Money first goes into the Oil and Gas Research Fund, which caps at $4 million per biennium. Additional money trickles to the state general fund. Once that hits $200 million, additional money moves to the Property Tax Relief Sustainability Fund, which caps at $341.8 million.

From there, money goes into the general fund again but caps at $100 million. Any money after that would go to the Strategic Investment and Improvements Fund, which caps at $100 million.

After that, up to $22 million would go to the state Disaster Relief Fund. If that caps, additional money could go back to the Strategic Investment and Improvements Fund. If that hits $300 million worth of unobligated money, 25 percent of any additional revenue would go to the Legacy Fund.

Here is what those funds are:

- Oil and Gas Research Fund: This money is used to research and fund new technologies and for geological studies.

- General Fund: During the legislative session, lawmakers spend this money on state budgets and projects. From July 1 to Oct. 31, $127 million in oil tax money went into the general fund.

- Property Tax Relief Sustainability Fund: Legislators set aside money for future property tax relief.

- Strategic Investment and Improvements Fund: This new fund is for one-time expenditures relating to improving state infrastructure or for initiatives to improve the efficiency and effectiveness of state government.

- Tribal money: Oil tax revenue generated on the Fort Berthold reservation benefits the reservation, the state and political subdivisions. On trust lands -- lands held in trust by the federal government for tribes or tribal members -- the reservation keeps 50 percent of the revenue. The rest goes through the state distribution formula. On nontrust lands, 20 percent of the gross production tax revenue goes to the tribes. The rest goes through the state distribution formula. New wells on nontrust land are exempt from the oil extraction tax for five years. During fiscal year 2011, the tribe received $33.5 million in oil tax money, according to the state treasurer's office.

Confusing, I know. I'll be back next week to explain the gross production tax formula.

Do you have a question for a North Dakota state government official or agency? Send us your question, and we'll do our best to find an answer.

E-mail politics@wday.com (Subject: Ask your government).

You may also write to Teri Finneman c/o Forum Communications, Press Room, State Capitol, Bismarck, N.D. 58505.

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