Oil & Gas Tax Distribution

Gross Production Tax and Distribution Formula

The first major discovery of oil in North Dakota was in 1951. Petroleum was discovered in a wheat field on the Clarence Iverson farm near Tioga in Williams County. Within two months of the Iverson strike, 30 million acres were under lease, and 122 wells were drilled in 1952, only 80 of which were successful. Total North Dakota production in 1952 was 1,603,555 barrels.

Tax discussion began almost immediately. The 1953 Legislature enacted a 4.25 percent production tax, while exempting oil-producing assets from property taxes. Legislators recognized the impact that the industry would have on local governments. An excerpt from a legislative memo in 1953 stated that part of the tax should go to counties and political subdivisions, noting that the impact to counties is “largely through the wear and tear on the highways because of the hauling of heavy drilling equipment,” and that there would also be impacts from “the influx of oil workers with their families and the increased need for school facilities and municipal services. The memo also acknowledged that local subdivisions should receive the tax revenue “during early years of production.” 

The gross production tax (GPT) rate was increased to 5.0 percent by the 1957 Legislature, and has been at that rate ever since. There have been many tweaks to the gross production tax over the years, with a flurry of changes occurring during the state’s second oil “boom” in the 1980s. As the boom took off, a 6.5 percent extraction tax was added to the books through a 1980 initiated measure approved by voters. As production waned in the late 1980s, tax incentives and triggers were approved to encourage new or additional production. 

There have been multiple changes to the gross production tax distribution formula over the years, the most recent of which was HB 1066, better known as Operation Prairie Dog. The five percent tax is separated into two distribution brackets – a 1% side that supports state “buckets” including the Abandoned Well and Reclamation Fund; Outdoor Heritage Fund; General Fund; Tax Relief Fund; Budget Stabilization Fund; Lignite Research Fund and the Strategic Investment and Improvement Fund. The 1% side also provides buckets to non-oil-producing cities, counties and townships that must be spent on infrastructure, as well as up to $20 million for airports. Due to the downturn in oil prices in early 2020, most of the buckets earmarked for non-oil regions will not fill. 

The 4% side of the GPT formula is divided between the state and local political subdivisions. The first $5 million of tax revenue collected goes to the county in which the oil was produced. Thereafter, additional revenue is split with the state getting 70 percent of the revenue, and schools and local government the remaining 30 percent. The 4% side also provides buckets for Hub Cities and Hub City Schools.

Extraction Tax

The oil extraction tax became effective January 1, 1981, as a result of an initiated measure passed by the voters of North Dakota at a tax rate of 6.5%. Initially, 30 percent of the tax went to the state general fund, 60 percent to schools and 10 percent to the Resources Trust Fund. Today, 30 percent goes to the general fund, 30 percent to the Legacy Fund, 20 percent to the Common Schools Trust Fund, and 20 percent to the Resources Trust Fund.

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Issue Updates

4/30/21 - Legislature Okays “Streams” Bill: Senators Say Bill Lacks Commitment
The legislature approved a so-called "streams" bill, intended to direct areas of future spending of Legacy Fund earnings. The bill specifically targets $150M for bond repayment and $60M to the highway fund. Remaining amounts would go to other legislative purposes that may include tax relief, research and support for clean sustainable energy, and to the Strategic Investments and Improvements Fund.

4/30/21 - “Straddle Well” Bill Signed: Oil Tax Sharing for MHA Nation
Legislation establishing a tax-sharing agreement for "straddle wells" around the perimeter of the Ft. Berthold Reservation was signed into law this week in a ceremony at the Capitol. The legislation will provide a share of oil tax revenue collected from the oil wells to the Mandan, Hidatsa and Arikara Nation.

4/30/21 - OMB Bill Funds Townships, Tech-Ed: Money for Pulver Hall, Minot Science Center
The OMB appropriations bill contains a total of $20M directed to non-oil townships, aiming to support those in eastern ND that experienced flooding. There is another $10M available to townships in oil-producing counties that is part of a $100M appropriation the state hopes to leverage with additional dollars from the federal government.

4/23/21 - Burgum Signs $680M Bonding Bill: Spending Package Frees Up Other Funds
In a bi-partisan ceremony, Gov. Doug Burgum signed into law a $680 million bonding package that will fund major flood control projects in Fargo and Minot, and provide infrastructure money for roads, bridges, water projects and an agricultural facility.

4/16/21 - Bonding Bill Goes to the Governor: $680M Package Ok’d by Senate
A first-of-its-kind bonding bill to be financed with earnings from the Legacy Fund is on its way to Gov. Burgum's desk for his signature. The $680 million package contains funding for flood control projects, roads and bridges and an agriculture products development center at NDSU.

4/9/21 - Governor Signs Legacy Investment Bill: Measure Will Support In-State Entrepreneurs
Burgum signed a bill requiring up to 20% of Legacy Fund principal to be invested in ND. The legislation directs officials to target up to 10% of the principal to infrastructure loans to political subdivisions and to the Bank of ND's certificate of deposit match program; as well as up to 10% to equity investments with an eye toward emerging or expanding companies in the state.

4/2/21 - Loan Pool Added to Bonding Bill: $250M for Clean Sustainable Energy
The Senate Finance and Taxation Committee approved an amendment to HB 1431 that restores many items the House removed from the original bill. The amendment also added a new item: $250 million to establish a revolving loan fund to support clean, sustainable energy projects.

4/2/21 - Bekkedahl Wants Stream for Western ND: Legacy Legislation Focuses Too Much on East
Williston Sen. Brad Bekkedahl said he is frustrated that much of the focus of Legacy Fund earnings investments are directed to eastern ND, when all the money that supports the fund were generated in the west. His remarks came during testimony on HB 1380, the so-called "streams bill" that would earmark future Legacy Fund earnings to various categories of proposed spending.

3/26/21 - Bonding Bill Back to $1.1 Billion: Loan Pool Added for CO2 Capture Projects
A revolving loan fund added this week to a bonding bill under consideration by the ND Legislature could help fund future projects aimed at capturing carbon dioxide from coal plants. With the amendment, the bill is now back to $1.1 billion, which is where it started the first week of the legislative session.

3/19/21 - State Budget Forecast Looks Brighter: Oil Production Flat, But Prices Are Better
Moody's Analyst Dan White said oil demand is gradually recovering from losses due to the pandemic, and crude prices have increased as well. But White said he expects ND oil producers to remain cautious about investing capital in expanded drilling until they're confident prices will remain in the $50/barrel or higher range.

3/19/21 - Study Shows Statewide Oil Benefits: Industry Contribution Tops $22 Billion
Separate studies released this week show that in 2019, the oil and natural gas industry in North Dakota accounted for more than $40 billion in gross business volume, nearly 60,000 jobs and over $3.8 billion in state and local tax revenues. Since 2008, ND oil producers have contributed more than $22 billion in tax revenue to the state's coffers.

3/5/21 - Helms: Oil Prices Will Soon Peak: No Drilling Uptick Despite $60/bbl Oil
The state's current budget forecast predicts oil prices remaining at $40/bbl through the biennium. Helms said that forecast is "super solid," and can be maintained with the state's current pace of completing 30 to 40 wells per month.

1/22/21 - Investing Legacy Dollars in North Dakota: Bill Provides Capital to Innovative Projects
HB 1425 would provide a low-interest loan opportunity to local governments. The legislation specifies that "up to 40 percent must be targeted for infrastructure loans to political subdivisions, at a fixed rate of 1.5 percent.

1/8/21 - Porter, Wardner Introduce Bonding Bill
With interest rates at historic lows and the state looking to rebound from effects of the COVID-19 pandemic, Republican legislators this week introduced a $1.1 billion bonding bill to fund major infrastructure and other projects in North Dakota.

12/18/20 - Sen. Wardner Pitches Bonding Proposal
On the heels of a bonding plan offered by Gov. Doug Burgum in his budget address to the legislature, North Dakota's Senate Majority Leader pitched his own $1 billion proposal to the Executive Committee of the Western Dakota Energy Association this week.

12/4/20 - Burgum Proposes $1.25B Bonding Plan
North Dakota has harnessed the power of bonding for decades. State agencies currently hold a modest balance of $2.25 billion in bonds issued mostly to support housing and water projects. However, the state has not used bonding extensively for transportation projects as many other states do.

Resources and References

Media Coverage

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