Schafer says 'Fix the Tax' to sustain North Dakota oil boom

North Dakota should lower its oil extraction tax rate now to ensure a continuing strong oil industry in the state -- and continuing strong state revenues from that development -- former Gov. Ed Schafer told several Grand Forks audiences Wednesday.

Schafer, who was governor for eight years in the 1990s and later served as President George W. Bush's secretary of agriculture, brought his "Fix the Tax" campaign to the city, hoping to build grass-roots support for lowering the state's oil extraction tax.

"It's been an exciting time in North Dakota" because of the oil boom in the western part of the state, Schafer ("Call me Ed") told students and others at a noon forum in UND's Memorial Union. "But are we becoming dependent on oil revenues again?"

After drawing a crowd by laying out 30 free pizzas, Schafer offered a history lesson on the state's "boom and bust" experience with oil. In the 1950s, after the discovery of oil in western North Dakota, and again in the late 1970s and early 1980s, he said, the state relied too heavily on oil tax revenues for general spending.

When he was governor, oil tax revenues accounted for about 25 percent of state spending. "We are 30 percent dependent now," he said, and Gov. Jack Dalrymple's current budget proposal will push that to about 35 percent.

Drilling and production in the Bakken formation in western North Dakota is booming now, he acknowledged, and the state is reaping the benefits -- including a state budget surplus of more than $1 billion. But what happens if the drilling rigs move to Montana, Texas or other oil states, lured away by lower extraction taxes?

North Dakota taxes most oil at 11.5 percent, the highest rate in the Lower 48 states, and the tax structure is complicated. Texas and Oklahoma tax at 7 percent, Montana at 9.5 percent.

Alaska's oil tax rate is nearly double North Dakota's, but it's considerably easier to get at Alaska's oil, Schafer said.

"Our costs are high here, to get the oil out," he said. "Our transportation costs (to get the oil to refineries) are high." Consequently, he said, "our tax structure needs to be competitive with other states. When oil companies decide (in the future) where to drill, we need it here."

Schafer took his message urging lower oil taxes to the Herald's Editorial Board earlier Wednesday, and later spoke to local business leaders and others at the Center for Innovation at UND.

Since starting the "Fix the Tax" campaign on behalf of the nonprofit Invest in North Dakota last week, he has hosted "town hall" discussions in Williston, Bismarck and Fargo, and was scheduled to go to Minot today. He plans "town hall" discussions later in Tioga, Stanley and other smaller towns in the Oil Patch.

He urged his listeners at UND to get involved in the debate over oil taxes.

"We're generating this discussion so you'll talk to your legislators, talk to opinion makers, talk to policy makers," he said.

Who's paying?

A student at the UND forum asked Schafer who was paying for his bus tour of the state to promote a lower oil tax, and he responded with a general accounting: Support has come from a variety of sources, he said, including an oil company, a health care company, a large agriculture-based source and several small individual donations.

Invest in North Dakota is a 501(C)(4) organization and is not required to disclose funding sources.

The oil companies

"wouldn't be here if it wasn't profitable already," said Aaron Wentz, a UND senior from Grand Forks. "The oil companies are pulling money out of North Dakota hand over fist."

In the boom of the past few years, companies usually have been drilling the first "discovery" wells on leased lands, Schafer said, which allows them to hold onto those leases but doesn't necessarily mean they'll develop the properties further, at least not immediately.

"We need the oil companies to drill those second, third and fourth wells" on leased land, he said. "They won't drill them if we're not competitive. We don't want to chase them out."

Grant Hauschild, a senior from Fargo and UND student vice president, questioned the idea of dropping oil taxes "when we have really big issues we need to fund," including road and other infrastructure improvements, expansion if UND's medical school and flood protection in Fargo and elsewhere.

"Lowering taxes does not make any sense to me," he said, drawing applause.

The state has to "look at the long term, not just today," Schafer responded. "If we don't have the revenues coming in (years down the road), we won't have the money to pay for all those good things."

Jacob Geiermann, a first-year law student from Bismarck, told Schafer that "most of us can agree that the power to tax is the power to destroy," but "the oil companies are doing just fine now, and I don't see the need to change (the tax structure) right now."

"When is the best time to lower the tax?" Schafer responded. "Three years from now, when you start to see the revenue falling off?" If the drilling rigs are moved to more competitive states, it will take a long time to lure them back, he said.

Rich Becker, whose Becker Marketing Co. in Grand Forks does consulting work with the oil industry, told Schafer that North Dakota "has the most convoluted tax structure in history," and the former governor agreed.

"We need to simplify that," he said, "this cobbled-together, cross-eyed piece that's there."

Asked what he thought the ideal tax rate should be, Schafer deferred to the Legislature, but he noted that drilling in the Bakken is drifting toward the Montana border and Montana's tax rate is 9.25 percent.

"My first competitor is Montana," he said.

No bill to lower the state's tax has been introduced, but Schafer said more than 70 bills relating to oil have been and could carry a tax-reducing amendment.

Reach Haga at (701) 780-1102; (800) 477-6572, ext. 102; or send e-mail to chaga@gfherald.com .