Why Low Oil Prices Are Bad News for State Budgets

Low Oil Prices Aren't Good For Everybody
Low Oil Prices Aren’t Good For Everybody

While many states rely heavily on taxes levied on the oil and gas industry, the falling price of oil in recent months is contributing to the drying-up of much-needed tax revenues. How do states such as Alaska, Texas and other mineral-rich states get creative when they need to supplement their budgets? Here’s a quick look at why low oil prices are bad news for state budgets.

Rainy Day Funds

Sure, you love the low price of gas at the pump when filling up, but not everyone thinks this is great. States like Alaska, Louisiana, Montana, New Mexico, Texas, North Dakota, West Virginia and Wyoming depend on severance taxes levied on oil and gas producers, and with oil prices plunging from $96 a barrel in July 2014 to about $50 a barrel today, these states have no choice but to tap into their rainy day funds, slash spending or raise taxes, according to The Huffington Post.

Each state on this list is affected differently. For example, Texas produces more than 100 million barrels per month of oil—more than anywhere else in the nation—yet only nine percent of its revenues are sourced from severance taxes. This stands in stark contrast to Alaska, which only produces 16 million barrels a month yet derives nearly 80 percent of its revenue from severance taxes.

States’ Responses

The hardest-hit states, such as Alaska, Texas and Montana, have to consider some hard realities in order to offset the reduction in tax revenues. What they could once count on as a given is no longer an option. With Alaska currently experiencing a $3.6 billion gap in its $6.1 billion budget, law makers in the state are proposing a spending cut of between five and eight percent.

There are other options for Alaska, though: it could tap into its Permanent Fund, which contains money from surplus revenues resulting from the development of the state’s invested oil and gas reserves. This fund currently shells out a yearly dividend to eligible Alaska residents. Currently, that fund holds about $50 billion. Stripping the state spending budget only to essential services could help offset the reduced severance taxes coming in, but over the long haul, many decision-makers feel it’s wise to create a more balanced tax structure to handle dips in the availability of severance funds.

North Dakota is another state looking at a cut in severance taxes—from $8 billion in oil revenue to $4 billion. Its reserve fund holds about $1 billion currently, which includes money earmarked for water projects, disaster relief and infrastructure improvements. However, the state can’t dip into this until a 2.5 percent cut has been made to all state agencies. At the federal level, Congress is considering stepping in to raise the gas tax for the first time since 1993, where this tax has remained at 18.4 cents per gallon, according to The Washington Post. However, that is not a certainty and Congress is still debating the issue.

While the states facing this oil and gas revenue shortage are by no means broke, this situation does pose a challenge for them, prompting more creative uses of budgetary resources.  However, these States would be wise to start thinking about contingency plans as low oil prices could become the “new normal”; especially since the push for clean & renewable energy has been reinvigorated as prices drop and climate change becomes harder and harder to deny.