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Tax Law

State Net Capitol Journal – February 22, 2016; Oil Price Collapse Pressures State Budgets


Budget & Taxes

Oil Price Collapse Pressures State Budgets

The collapse of oil prices is taking a toll on energy-producing states. As job losses mount in the nation’s oil patch, depressed oil and commodity prices are having a ripple effect on state budgets.

As many as a dozen states have been affected by the energy-price downturn, said Scott Pattison, chief operating officer for the National Governors Association.

North Dakota Gov. Jack Dalrymple (R) has ordered cuts to close a $1 billion budget gap. Alaska Gov. Bill Walker (I) has proposed that the state adopt an income tax. Oklahoma is making across-the-board spending cuts and New Mexico is reducing spending on higher education and other items as these states struggle to balance their budget. Alaska, Louisiana and New Mexico risk lowered credit ratings, according to Standard and Poor’s rating services. In Texas, state revenues from oil and natural gas fell 48 percent in the first four months of fiscal 2016.

The situation in these states reflects a global predicament. As The Economist puts it: “The world is drowning in oil.” The British publication enumerated reasons for the glut: Full-tilt oil production in Saudi Arabia, which seeks a competitive edge over the United States and political advantage over Iran and Russia. The lifting of economic sanctions against Iran, which has pushed millions of additional barrels of oil onto the market. Weak growth in China that has reduced demand.

It could get even worse. Figures published early this month revealed that Russia, one of the world’s largest oil producers, pumped at record levels for the post-Soviet Union era in January. According to the London Daily Telegraph, Russia produced 10.88 million barrels a day last month, an increase of around 80,000 barrels from December.

U.S. producers have also contributed to the glut. U.S. shale farms cut more than 400,000 barrels a day from their output in response to falling prices, but still increased oil production more than any other country in the world in 2015.

Economists around the globe were enthusiastic in 2014 when oil prices began their descent from $110 a barrel to their present level around $30. In the conventional view, cheap oil meant global growth, lower gasoline prices at the pump and more money in the pockets of consumers. Economists at JP Morgan Chase forecast last January that the oil-price slump would add 0.7 percent to U.S. growth in 2015.

By and large, these expectations came up short. Although nations lacking energy resources such as India benefited from reduced oil prices, overall global growth did not materialize. Some oil-producing nations such as Venezuela and Nigeria have been politically destabilized by the price collapse. Lower oil and gas prices have cost the jobs of about 100,000 workers in the United States and 250,000 worldwide. As many as 150 U.S. oil and gas companies could file for bankruptcy if oil prices remain at their present level, according to IHS, an energy research firm.

Instead of the surge predicted by the JPMorgan Chase economists, cheap oil shaved an estimated 0.3 percent off U.S. economic growth in 2015. One reason for the discrepancy between the prediction and the result is that wary consumers have saved instead of spent much of the extra cash provided by reduced gasoline prices. Increased savings may benefit these consumers in the long run, but it has taken a bite out of current growth and caused stock markets to tumble.

The impact on the budgets of oil-producing U.S. states has been uneven. Alaska, where the state government relies most heavily on oil and gas severance taxes, is reeling. So is Louisiana, where reduced energy income accounts for nearly half of the Pelican State’s $900 million budget shortfall.

But Texas, the nation’s largest oil producer, has effectively managed its budgetary issues because the Lone Star State has diverse tax sources. Diversity is the key, Pattison said. “Four decades ago, for instance, this situation would have been devastating to Colorado, which depended on taxes from mining and oil,” said Pattison. “But state revenues in Colorado are now so diverse, that the oil fallout is barely a blip.”

Officials in the affected states have scrambled because their budgets were based on the assumption that severance taxes would be levied on oil priced at $48 to $49 a barrel. Oil hasn’t been near that level for months and isn’t likely to bounce back soon. The current consensus is that low prices could persist well into 2017 because of continued substantial production and bulging inventories.

But low prices won’t last forever. Some of the experts on a panel assembled by Politico magazine warned against ignoring lessons of the past. “We have been there before,” said Gal Luft, co-director of the Institute for the Analysis of Global Security. He observed that the global response to the oil crises of the late 1970s was to increase production and enhance energy efficiency, causing prices to fall. “The party didn’t last for long,” Luft said. “Between 1998 and 2008, oil prices rose seven-fold, triggering the Great Recession. This might happen again if the global economy snaps back from its stagnation.”

Seeking upsides to the oil price collapse, Thomas McNulty of Navigant Capitol Advisors, a consultancy, told CNBC that the “silver lining” of the present crunch for oil companies was the rapidity with which they moved to cut costs and build efficiencies. Although the number of drilling rigs used in the United States has dropped by more than 60 percent, many shale oil operators are still producing. Simon Henry, Shell’s chief financial officer, said that because of the high cost of mothballing wells it is sometimes more expensive to stop production than to keep pumping at low prices.

One positive global impact of cheap oil is that it has reduced the price of natural gas, crowding out coal, a dirtier fuel. Nonetheless, there is concern that $30-a-barrel oil threatens alternative-energy development. Solar energy stocks have fallen in tandem with oil prices. David Livingston, an associate with Carnegie’s Energy and Climate program, said that cheap oil makes transition away from a fossil fuel–based economy longer and harder. “The risk of missing climate goals rises,” he said.

Not everyone shares this view. Daniel C. Esty, a Yale professor of environmental policy, told Politico that a short-term drop in fossil fuel costs could over time strengthen the prospects for alternative energy. “If the developers of wind, solar and other alternative energy projects are forced to cut costs, their technologies will be more cost-competitive over time,” Esty said.

There are other reasons for optimism. Largely overlooked in the concern about the deleterious effects of cheap oil is that the United States has finally achieved a long-sought goal of energy independence. This accomplishment provides scant current comfort to laid-off oil workers, hard-pressed state officials or investors, but could be crucial to national survival should a future crisis interrupt the delivery of oil from the Middle East.

Another boost could come from a provision in the omnibus tax bill passed by a Republican Congress last December and reluctantly accepted by the Obama administration, which had previously opposed it. This provision removed a 40-year ban on exporting U.S. oil. Ending the ban has little impact now but could prove a boon to the oil patch once prices rise again.

There are benefits as well as harm from cheap oil.







Budget & Taxes

Rauner Issues IL Budget Ultimatum

Illinois Gov. Bruce Rauner (R) proffered two options for the coming budget year - which is still in a stalemate over the current year budget: If lawmakers will go along with a slate of reforms he campaigned on but has so far been unable to pass, he will concede to a budget with more revenue and more spending; but if not, he said the Democrat-controlled legislature should get out of his way and let him make about $4 billion in cuts to the budget himself.

Rauner’s proposed reforms include changes in collective bargaining rights that are opposed by unions, changes in how legislative boundaries are drawn and a freeze of property taxes, among other issues.

Rauner told the lawmakers in his budget address that if they won’t go along with his so-called “turnaround agenda” - as they have refused to do over the past year - or work with him on deep budget cuts, then they should give him the power to cut the budget unilaterally.

“I won’t support new revenue unless we have major structural reforms to grow more jobs and get more value for taxpayers,” Rauner said in his speech outlining his approach to spending. “You choose. But please, choose now.”

Rauner’s proposal if he were to cut the budget would be for a $32.8 billion plan, without any new revenue to get to the higher $36 billion budget he says he would agree to if lawmakers would go along with his other proposed changes.

Most of the issues the governor is at odds with lawmakers over haven’t changed. The disagreement includes a new labor contract Rauner wants with the state employees’ union.

Illinois has been without a fully implemented budget for nearly eight months because of disagreement between legislative leaders and the second-year GOP governor.

House Speaker Michael Madigan (D), of Chicago, has said new revenue is needed in addition to cuts to the budget.

Rauner last year signed a school funding measure, but refused to agree with lawmakers on other budget issues, leaving much of the government relying on ongoing appropriations, and withholding payment for many items that aren’t required by courts to be funded.

Protesters sounded off outside the House chamber as Rauner spoke, including low-income college students who are facing the loss of state aid.

Illinois has a current backlog of $7.17 billion - and growing - in unpaid bills, according to the state comptroller. (ASSOCIATED PRESS, REUTERS, CHICAGO TRIBUNE)

Edwards Throws Hail Mary for Raising Revenue

Louisiana Gov. John Bel Edwards (D) is proposing deep cuts in the state budget, a hiring freeze, a temporary one-cent sales tax increase and higher alcohol and cigarette taxes to close a looming budget shortfall of nearly $1 billion.

The increased revenue and cuts are aimed at saving potentially life or death state programs and keeping hospitals open, Edwards said. But they’re also needed to continue something some folks see as bigger than life or death in Louisiana: LSU football.

If the Republican-led legislature punts? College campuses in the Bayou State could be forced to close, preventing students from finishing classes and subjecting them to incompletes instead of final grades. That could then bring NCAA eligibility rules for athletes into play.

“That means you can say farewell to college football next fall,” Edwards said in a rare statewide TV address last week ahead of a special session called by Edwards that began on Sunday.

Edwards, who says he inherited the crisis from his Republican predecessor, Bobby Jindal, also is proposing to use $128 million from the state’s rainy day fund to balance the budget. The Senate agreed unanimously on Wednesday to dipping into the rainy day fund, sending that proposal to the House, along with another Edwards proposal to redirect $200 million in money from BP for the 2010 Gulf of Mexico oil spill.

Some of the shortfall is also due in part to the global oil glut, which has reduced prices and led to layoffs in the oil-producing state.

Lawmakers began sifting through Edwards’ proposals on Wednesday, with the first committee votes on tax increase proposals expected late in the week or early next week.

The hole must be closed by the June 30 end of the fiscal year.

Louisiana’s higher education commissioner, Joseph Rallo, raised the football issue in a letter to the governor’s budget office. Rallo said all of Louisiana’s public colleges and universities will have to suspend classes immediately if the governor and Legislature don’t find additional revenue for higher education. The NCAA doesn’t allow athletes with incompletes to compete. (THE TIMES-PICAYUNE [NEW ORLEANS], FOX NEWS, ASSOCIATED PRESS)

Budgets In Brief - February 22 2016

Christie Rolls Out Budget Proposal: Gov. Chris Christie (R) returned to NEW JERSEY from the presidential campaign trail on Wednesday to propose a $34.8 billion budget for the coming fiscal year. That marks a $1 billion, or 3.1 percent, increase in spending, matching an expected 3.1 percent increase in revenue. Nearly all the growth is earmarked for pensions, government employee health benefits and debt service. The proposal also banks on an expected boost in income and sales tax collections from a rebounding economy. The plan would put $1.86 billion into the state pension system, the largest ever contribution, but still only about 40 percent of what actuaries have said is needed to pay what retirees are owed. Christie is proposing to spend nearly $550 million more on aid to schools, but about $400 million of that is for teacher pension and medical costs and another $50 million or so is for debt service on school construction. The proposal doesn’t include a renewal of New Jersey’s transportation trust fund, which pays for road and bridge repairs and is scheduled to run out of money at the end of the fiscal year. Christie touted the fact that less than 1 percent of revenue in the proposal comes from one-time sources of money, down from 13 percent from the budget the year he took office. (THE PRESS OF ATLANTIC CITY, POLITICO, THE RECORD [BERGEN COUNTY]) * OKLAHOMA BUDGET IS NOT OK: An Oklahoma Senate committee this week approved legislation to raid the state’s road and bridge fund for $59.7 million to help close a $1.3 billion budget hole in the Sooner State. The road and bridge fund will still have $471 million for projects, state Sen. Ervin Yen (R) said of his bill, which now goes to the full Senate. Yen also said future increases in the account won’t take place unless general revenue growth hits 4 percent on an annual basis. (OKLAHOMAN [OKLAHOMA CITY])

- Compiled by DAVE ROYSE

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