Cloudy with a Change of Subsidies

As tax rebates and incentive payments to businesses continue to deplete revenue intended for Oklahoma’s General Revenue Fund (GRF), which has fallen more than 13 percent below estimates, legislators must come up with a remedy. Otherwise, the $1.3 billion budget shortfall will continue to grow.

May marked the fourth time in the current fiscal year that the state’s main operating fund received no corporate income tax collections, according to Oklahoma Secretary of Finance, Administration and Technology Preston Doerflinger. The gross corporate income tax collection for May was $9.8 million, while tax refunds totaled $14.8 million, creating a $5 million deficit. In order to offset the difference, $5 million was “borrowed” from personal income tax collections to help pay the corporate income tax returns.

Wind companies received $3.3 million under a zero-emissions-tax incentive. But according to the Oklahoma Oil and Gas Association (OOGA) President Chad Warmington, “There’s a big difference between that and what the oil and natural gas tax structure looks like in Oklahoma.” And unlike oil and natural gas companies, “The state actually pays wind companies to produce energy.”

Subsidies for the wind industry are clearly contributing to the state’s fiscal problem. Subsidies and tax credits work differently, even though they are often lumped together. Tax incentives reduce the tax burden, while subsidies act as direct payments.

That said, oil and gas companies pay a 7 percent flat tax on production. However, with incentives for such activities as drilling new wells, producers are required to pay a 2 percent tax on production from new wells for a 36-month period. On the other hand, new wind turbines are allowed an ad valorem (according to value) tax credit that prevents an increase in property taxes for a period of five years. The state is compelled to pay the respective county the amount of additional tax equal to the land’s increased value.

The difference between wind and gas is that every time a wind turbine spins and produces electricity, the state recoups a credit to the producer. This is not the case with oil and natural gas. The state legislature has lowered and altered the subsidies for the oil and natural gas industry. However, the tax subsidies for the wind industry have not changed since they were initially created by the legislature. Considering that the wind industry’s tax subsidies were passed when the state was not facing a $1.3 billion budget shortfall, the state legislature should take a second look at wind industry subsidies and the role they should continue to play in Oklahoma’s economy.

Oil and natural gas are far outpacing wind in regard to tax revenue. Revenues from oil and natural gas producers is collected through the Gross Production Tax (GPT) which goes directly into the GRF. In 2015, the state collected $541 million from the oil and natural gas industry, or 23 percent of the state’s tax revenue.

On the other hand, wind power has provided zero net revenue to the state’s overall economy. The only exception to this would be that wind subsidies have benefitted the utility companies since they are able to buy power a lower rate, which in turn has kept electric rates in Oklahoma from climbing higher than those in other states. Therefore, the average citizen is “benefitting” from buying electricity rather than “shareholders and corporate officers,” according to Mike Bergey, President and CEO of Bergey Windpower.

But this conclusion is misguided. The benefit enjoyed by consumers comes at the expense of taxpayers, who are subsidizing the wind industry through deficit spending. If wind power was truly providing an economic benefit to Oklahoma, then wind producers would not to be dependent on the state in order to remain in business.

As OOGA President Chad Warmington put it, “Is there enough net benefit from wind? I think with oil and natural gas, it’s pretty clear. I mean, 23 percent of state taxes are paid by the oil and natural gas industry, one in five jobs. It’s inarguable the impact that oil and natural gas has in Oklahoma … I think that’s what the legislature is considering now. If we didn’t pay the wind industry to produce, would they do it?”