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.