8 states take a big budget hit due to falling oil prices

It’s no surprise that the slump in oil prices, now 20 months old, is taking its toll on states that are particularly dependent on oil production to balance their budgets. But the impact is becoming clearer than ever, especially when you factor in steep declines in natural gas and coal prices over the same period.

A new report from the Rockefeller Institute of Government at the State University of New York suggests growing trouble for the eight states where oil, gas and mining account for 10% or more of gross domestic product.

As a group —  Alaska, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, West Virginia and Wyoming  —  count on severance taxes for 16% of their tax revenue, far more than the 0.2% reliance for the rest of the U.S.

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Severance taxes are determined by the value or volume of the resource being extracted, or some combination of the two.

For the 12-month period ending in September, severance-tax revenue for the eight states fell by 35%, going from $15.5 billion to $10 billion.

The declines ranged from 88% in Alaska, where low oil prices combined with waning North Slope production have devastated the state’s economy, to 16% in West Virginia, where coal miners are being laid off by the hundreds.

“No state had predicted that oil prices would fall so dramatically,” Lucy Dadayan, an author of the report, “Double, Double, Oil and Trouble,” said in an interview. “Most states had factored in much higher oil prices in their state budgets.”

Since June 2014, U.S. prices for oil and natural gas have registered declines of 70% and 60%, respectively, while coal prices have fallen 22% over the past year or so.

Those slumps are cutting into drilling and mining and the jobs associated with those activities, weakening local economies and contributing to a 3% decrease in overall tax collections among the producing states, including income and sales taxes, the report said.

As of the start of this year, employment was down in all eight of the states except Texas and New Mexico, compared to one year earlier.

“Oil-dependent states will be faced with large budget gaps and significant fiscal pressure to address those gaps,” Dadayan said.

The report cites actions taken by oil- and mineral-dependent states in response to declining tax revenue. Among them, Alaska Governor Bill Walker proposed the first personal income tax for the state in nearly 40 years to help close a $3.5 billion shortfall, while North Dakota officials are anticipating a $400 million gap and the potential for cuts of 2% or more for state agencies.

In Oklahoma, state officials declared a “revenue failure” for fiscal 2016, with a projected $900 million gap in fiscal 2017.

The downturn in oil, gas and coal prices has a bright side, of course, especially for motorists, who are spending less to fuel their cars, as well as homes and businesses, which are seeing much lower bills for energy supplies.

Do those consumer benefits offset the losses in tax revenue and employment?

“Not really, at least not in the states that have high reliance on severance taxes and less diversified tax structures,” Dadayan said. “The falling prices have a negative effect on the broader economy despite some benefits for consumers.”

Bill Loveless – @bill_loveless on Twitter – is a veteran energy journalist and podcast host in Washington. He is a former anchor of the TV program Platts Energy Week.