North Dakota’s Energy Sector – The Gift That Keeps on Giving

Any governor would be delighted to have the “problem” of grossly underestimating projected revenue growth, even after enacting tax-cutting reforms. After all, logic would dictate that reductions in taxes (whether they be personal income taxes, corporate taxes, or otherwise) should result in revenue decreases, not increases. But traditional logic plays little part in this story. We are talking about an anomaly: North Dakota, a state where revenue projections always seem to be underestimated. In 2012, the variance between actual revenue and forecasted revenue was 28.5 percent, or more than $344 million. The discrepancy may be startling, but the explanation is clear: More people and new businesses are flowing in, as more oil and natural gas are flowing out, and all are on a steep vertical trajectory.

Compared to the 2009-2011 timeframe, revenues through January 2014 are up 84 percent, or $ 844.5 million. As the population and businesses grow, so too do tax collections from the expanded tax base, which is  up nearly $300 million over the 2011-2013 biennium, or a 19.2 percent increase. As a breakdown, these increased collections come from new sales tax revenue (up $133 million compared to the last biennium), new corporate taxes (up $37.3 million), and individual income taxes (up nearly $89.6 million since January). These increases come in spite of meaningful cuts to the corporate and personal income tax rates since the 2009 session. Back in 2008, voters defeated North Dakota Income Tax Cut “Measure Two,” a ballot initiative intended to reduce the state income tax rate by 50 percent and the corporate tax rate by 15 percent. But small incremental cuts since 2009 have now reduced the rates lower than the 2008 rejected levels.

While agriculture, forestry, fishing, and hunting make up a healthy portion of North Dakota’s revenues, these industries pale in comparison to the 800-pound gorilla in the room: namely, the state’s energy sector, including ancillary growth in new construction, real estate, technical services, support services, transportation, and IT operations.

There are approximately 8,500 oil wells currently operating in western North Dakota. Each well produces about 779,000 barrels of crude per day. Each well pays $4.4 million in taxes, and $1.6 million in salaries and wages. Over the past year, five new wells have begun production, per day!  To give you some idea of the staggering growth rate of this sector, in 2005, the oil boom contributed $4.4 billion to the state economy. That has now increased by almost 600 percent to $34.4 billion. The state’s unemployment rate has dropped from a respectable high of 3.3 percent in April of 2013 to 2.6 percent end-of-year 2013, a period of only 8 months. North Dakota’s economy has outpaced every state since the recession officially ended in 2009, with the fastest growth in personal income, tax revenue, jobs, and home prices, according to Bloomberg Economic Evaluation of States data.

Needless to say, if you are unemployed and don’t mind the smell of oil or sub-zero weather, then western North Dakota is the place to go. How about an average family income of $69,600, with more than 2,500 open jobs at any given time? It is apparent that many people are investing in North Dakota’s future, and as a result, we have those pesky revenue underestimates!