Flagging Commodity Prices To Lower States’ Tax Revenue Well Into 2016

With crude oil prices languishing in the $40-$50 range for months now, losses in related revenue sources that underpin energy states’ budgets are on the rise, according to a new report by Fitch Ratings. Arkansas may avoid serious budget problems.

“Stagnant commodity price trends are dampening energy states’ economic growth and are eating into economically sensitive revenue sources such as sales and personal income taxes,” said Fitch Senior Director Marcy Block. “As to which states will be most adversely affected, the impact will vary considerably.”

The Fitch report follows an Oct. 13 Talk Business & Politics article highlighting the fact that Arkansas tax revenue for natural gas production fell to only $3.79 million at the end of September, down 50% from collections of $7.56 million a year ago. For the first quarter of fiscal 2016, or the three-month period ended Sept. 30, severance tax revenue collected on marketed natural gas sales plunged 54.4% to only $10.87 million, compared to $23.86 million in the same period in fiscal 2015, according to monthly tax data compiled by the Revenue Division of the Arkansas Department of Finance & Administration.

In the fiscal notes and supporting documents filed with the state’s September revenue report, DFA data showed that severance tax collections for oil and gas were 34% below forecast and nearly 65% below last year’s results.

In the Fitch report, Block said some states have long had the financial flexibility to adjust to commodity market swings. Should the prolonged slump in commodity markets extend into fiscal 2017, “we would expect states to identify fiscally prudent strategies to address vulnerable state revenue sources.”

However, the Fitch analyst said, states with more diverse economies and revenue resources should be able to weather prolonged commodity price declines more effectively than those states that rely more heavily on commodity production. States like Alaska, North Dakota and Wyoming are more directly in the crosshairs of this trend, Block said.

Even though severance collections from the state’s oil and gas industry have been an increasing source of revenue over the past decade, it has never been a major source of tax dollars that flow into the Arkansas budget coffers. For instance, of the $1.52 billion in year-to-date gross revenues for the first three months of Arkansas’ fiscal year 2016, severance collections from oil and gas represented only 0.2% of the state’s tax bounty.

Unlike most states, which levy severance taxes based on market value, Arkansas’ natural gas severance tax is levied on the volume produced. In 2009, the Arkansas Legislature raised the levy on natural gas production, applying tax rates of 1.25%, 1.5%, and 5% depending on the well classification by the Arkansas Oil and Gas Commission.

Crude oil production in Arkansas is taxed at 4% of market value for marginal wells that produce 10 barrels or less per day, and 5% for oil companies with greater output.