The Texas Squeeze: A series examining the high cost of high growth in North Texas.
In each of the past two months, Texas has collected over $1 billion in taxes on oil and gas production — a record pace.
The strong performance has been going on for a while. Through nine months of the fiscal year, energy companies paid $7.35 billion to Texas in oil and gas production taxes, according to data from the Texas Comptroller.
It’s the biggest annual haul ever, almost 46% higher than all of 2021 — and that’s with three months remaining in fiscal 2022.
The record tax total is the result of two major factors: an increase in the production of oil and gas and sky-high increases in their prices.
Inflation is afflicting much of the US economy, and energy has been a major contributor, a trend made worse by the Russian invasion of Ukraine.
Consumers and businesses are paying much more for gasoline and electricity, and that’s already creating headwinds for the economy. But oil and gas production taxes, which help fund public schools, roads, first responders and other essential services, represent an offset.
“I don’t know if it’s a double-edged sword or a silver lining, but it’s how things work in Texas,” said Joshua Rhodes, a researcher and energy expert at the University of Texas at Austin. “These taxes will provide a big slug of money for roads and such, but other parts of the state are going to be hurting.”
The Texas Oil & Gas Association put out a news release trumpeting the record tax revenue and said it “continues to be a game-changer for Texans.”
On natural gas, producers pay the state a tax rate of 7.5% of market value; on crude oil, they pay a tax rate of 4.6% of market value.
The oil and gas industry group may be touting its tax contributions now, Rhodes said, because its members are racking up big gains on the bottom line. And some in Congress are proposing a windfall tax on oil profits.
Pioneer Natural Resources, a leading player in West Texas’ Permian Basin, reported $2 billion in profits for the first quarter, up from a small loss for the same period last year.
Exxon Mobil, a global energy leader and major operator in Texas, earned $5.5 billion in the first quarter, double the total from last year.
Knowing that Texas is collecting billions in taxes on oil and gas may not ease anyone’s pain at the pump. “But people may feel better knowing that energy companies are paying — quote, unquote — their fair share of taxes,” Rhodes said.
The oil and gas industry also pays billions in property taxes and state and local sales taxes, the oil and gas association said. Taxes are assessed on a range of industry assets, including mineral-producing properties, pipelines, refineries and gas stations. Companies also pay a state franchise tax and federal tax on corporate profits.
There’s a significant benefit with the state’s oil and gas production taxes, said Todd Staples, president of the Texas Oil & Gas Association: “Production taxes are borne by the producers, not consumers,” he said in a phone interview. “These kinds of taxes are not passed along.”
Crude oil is sold at a global price and Texas companies are competing with suppliers from around the world.
“There’s no way that a producer can say, ‘OK, I want to charge you extra because I’m paying more in production taxes,’ ” Staples said.
He contrasted it with a motor fuels tax, which is added at the pump by state and federal governments. Those state collections, totaling $733 million in Texas through nine months, are actually down slightly this year, according to the Texas Comptroller.
Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University, has a different take on who ultimately pays Texas’ oil and gas production taxes.
“In my opinion, producers don’t actually pay taxes,” said Bullock, who studied economics as both an undergrad and graduate student. “Consumers, shareholders or employees pay taxes, and they’re passed through the producer.”
So who’s absorbing the $7.35 billion tax hit so far this fiscal year? “I think the lion’s share of it is being borne by consumers right now,” Bullock said.
In Texas, regular gasoline sold for an average of $4.60 a gallon on Tuesday, up from $2.70 a gallon a year ago. Natural gas prices have more than doubled in the past year, and the average electricity rate in Texas’ competitive market surged over 70%.
Texas’ oil and gas production tax has a particular strength, Bullock said: “To its credit, it is very difficult to avoid, unlike an income tax,” which can be reduced by accounting maneuvers.
Rising prices have been a boon for producers in Texas, and Staples said the industry added 26,700 upstream jobs in April, a gain of 16.3% from the same month last year.
But prices are so high now, Bullock said, that they threaten economic prospects for consumers and businesses across the country. In past years, price spikes generally lasted for months or maybe a year. If the current environment continues for long — “If it becomes the new normal,” he said — that would discourage expansion by manufacturers in Texas and relocations of new employers.
“It could throw the economy into a recession, and then demand would drop,” Bullock said.
The solution? Staples said there should be more drilling in the US He criticized the Biden administration for canceling pipelines and offshore leases, and pulling back development acreage in Alaska.
“There’s been a chilling effect from these policies,” Staples said, and “they thwart future growth.”
“It all goes back to supply and demand,” he said.