Study: Tax Incentives Don’t Increase Natural Resource Extraction
The State Journal
29 May 2012
By Pam Kasey
Tax incentives aimed at encouraging natural resources companies to
increase their production don't really do that.
Their main effect is lower tax revenues.
That's the conclusion of the brief, "Do Tax Subsidies Influence
Domestic Oil Production?," released this month by Headwaters
Montana-based Headwaters describes itself as an independent
nonprofit research group with a mission of improving community
development and land management decisions in the western U.S.
The brief mainly compares the experience of Montana and North
Dakota, which have competed through incentives to increase the
production of oil and natural gas.
Three charts illustrate the data.
In the first, tax holidays for the first 18 months of production
in effect since January 2000 in Montana and intermittently from
2007 through 2009 in North Dakota are plotted with crude oil
production in both states.
The tax incentives appear to have no effect on production.
Montana's production rises slowly to a peak in 2006, then slowly
declines; North Dakota's begins rising in about 2006 and mostly
rises from there — both independent of the tax
After North Dakota's tax holiday became inactive in November 2009
because the price of oil hit a high-price trigger, production more
than doubled through February 2012, while in Montana, where the
tax holiday remained in effect, production dropped 14 percent over
the same period.
"The main lesson is that despite Montana's more favorable tax
policies relative to North Dakota … the state has not been able to
overcome geology," the brief's authors wrote. "Most drilling and
production remains in North Dakota where the oil resource is
The oil industry simply is resource-dependent, they wrote, unable
to move production to seek lower labor costs or greater tax
They also pointed out that income tax incentives come too late in
the business cycle — after exploration, proving of reserves,
acquisition of leases, and drilling — to affect production.
"Once reserves are proven, price is the largest driver of drilling
activity and production," they wrote.
That conclusion is backed up by a second chart that plots major
turning points in the prices of oil and natural gas with total
drilling rig activity for oil and, separately, for natural gas in
Colorado, Montana, North Dakota and Wyoming.
When natural gas prices went up in 2003, rig activity for gas
relative to oil shot up.
Rig activity for both dropped with lower prices in 2009.
But when the price of gas later stayed low while the price of oil
rose, rig activity switched to oil.
The main outcome of tax incentives, the authors further observed,
is to delay and reduce revenues that could help the state and the
affected communities mitigate the impacts of the activity.
A third chart shows that Montana will collect $800,000 less per
well over the first three years of production than North Dakota
does, and collects almost nothing for nearly two years.
"Despite dramatically different tax structures, tax rates, and
incentives, states have been unable to overcome geology in
determining the location of production, or the influence of
technology and price in changing the pace of development," the
brief concludes. "The main outcome of tax deductions and
incentives is lower tax revenue that makes it more challenging for
communities to facilitate and mitigate the impacts of an oil
These conclusions agree with the understanding of Ted Boettner,
executive director of the West Virginia Center on Budget and
Policy, which has published on this issue in its October 2011
"Marshall University Natural Gas Tax Study Proves Virtually
Nothing" and, in December 2011, "Investing in the Future: Making
the Severance Tax Stronger for West Virginia."
"Decisions on where to produce are tied to where the resource is
located, regardless of tax burdens and various incentives,"
Boettner said. "Other factors such as price, access to markets,
infrastructure (such as) pipelines, and technology all have more
significant effects on industry activity. Also minor variations in
wages, utilities, and transportation costs can have a greater
impact than major changes in taxes."
If West Virginia's severance tax and the low-gas-price environment
keep companies from drilling in the state, he said, they'll come
back when prices rise — "and the state will benefit more from that
Headwaters' funding comes from diverse sources including federal
agencies, nonprofit organizations and partners on specific
projects, according to the organization's website; researchers
maintain independence with regard to its interpretations, the
The current study does not say how it was funded.