Oil prices continue to fall with surpluses still over 1.5 million barrels. Despite rig counts in the US down from 1800 active rigs merely a year ago, to the current 650 active rigs, the surplus is persisting and is expected to stay as sanctions have been lifted on Iranian production. Morgan Stanley has models that show commodity prices as low as $20 in 2016. With the drop form $100 barrel crude in 2014, this has spelled disaster for state budgets that rely on severance tax revenue.
Many states were not prepared for such a drop in revenues and are now having to cut government spending and jobs. Brian Sigritz, director of state fiscal studies for the National Association of State Budget Officers, stated “it’s a question of how severe the impact is. States like Alaska, Texas and North Dakota all have built up sizeable reserves—rainy day funds.” As the oil glut continues, some states are entertaining the idea of tapping these reserves to fix growing budget gaps.
Most states now facing problems due to severance taxes, or lack thereof, still have a fiscal leg-up on the rest of the nation. When housing prices collapsed in 2008, many of the states with healthy severance taxes funds weathered the storm. Senior policy analyst at the Rockefeller Institute, Lucy Dadayan, pointed out “the bad news is that now they need to address the fiscal challenges created by the volatility in severance taxes.”
Alaska draws a whopping 78 percent of state revenues from severance taxes, compared to 46 percent in North Dakota, and only 9 percent in Texas. Alaska is now faced with their first income tax in 35 years. Similar issues are being experienced in Oklahoma as the state now faces its worst budget crisis in decades.
North Dakota, conversely, is riding out the storm better than other states. Although their predicted $8 billion in oil and gas revenue was cut in half to $4 billion, North Dakota House Majority Leader Al Carlson assures that the sky is not falling in North Dakota. If production in the Bakken continues to decline however, lawmakers will be calling for much deeper budget cuts.
Louisiana, while not experiencing as much pain as Alaska and Oklahoma, is feeling the slow effects of the oil glut. Economists for the Louisiana Legislature have calculated that for every dollar drop in the price of oil, the state loses $11 million dollars. Dadayan of Rockefeller again voiced her opinion saying “in the long run, a more viable option would be having more balanced tax structures in place.”