10/19/00 1:40 p.m.
Oil’s Well That Ends Well
The story behind Bush’s “tax cut for big oil.”

By David Guenthner, Managing Editor of The Lone Star Report

he West Texas regional economy drying up and blowing away, the United States on the verge of permanently losing one of its major energy reserves, dozens of local school districts facing fiscal catastrophe . . . yup, sounds like an "emergency" to me. As it did to Gov. George W. Bush and the vast majority of Democrats in the Texas Legislature.

But to Vice President Al Gore, Bush's response to the crisis two years ago in the Texas oil patch sounds like a perfect opportunity to score cheap political points.

It's becoming as common a refrain as "risky scheme" used to be in Gore's speech software. "When there was really a chance to do something to improve children's health, my opponent opposed expanding health care to cover more children," Gore drones. "My opponent put a big tax break for the oil companies first."

Give Gore credit where it's due. Most Americans' image of the oil and gas industry is a caricature of J. R. Ewing from the early 1980s television series Dallas. Gore's advisers are probably right that the casual voter still holds that image. But that image bears little resemblance to the Texas oil and gas industry today, and Gore's attacks grossly oversimplify what happened last spring.

First, it is important to understand that there are two economies in Texas: urban and rural. The new economy of high-tech, finance, and NAFTA-related commerce has created hundreds of thousands of new jobs — many of them high-paying — around Houston and along the IH-35 corridor, but rural Texas still depends on the oil, gas, and agriculture sectors.

In early 1998, oil prices began a yearlong nosedive. By that December, the average oil price dropped to $9.21 a barrel. At that level, it costs more to pull oil from the ground than it can be sold for on the world market.

The state exacerbated the problem by taxing every barrel of oil taken out of the ground — even if the producer lost money. The tax load on oil and gas producers is roughly three times that of the average Texas business, with the severance tax being the biggest special tax on the industry.

During the 12 months before Gov. Bush declared the "emergency," the number of oil and gas rigs operating in Texas fell by half. Here's what happens when production drops:

(1) People lose their jobs. During the 18 months of the price collapse, the Texas oil and gas industry lost nearly 50,000 jobs and $885 million in wages. The ripple effect swept under retailers and other businesses in oil-dependent communities.

(2) Ground and water pollution become a concern. When an oil well can't be operated economically any more, a producer in good financial condition will plug the well. During the 1998-1999 crisis, thousands of wells were abandoned because the producers were too broke to operate or plug them, which risked contamination of the land and groundwater. The state had to plug them, at a cost of millions.

(3) America loses that energy resource forever. Even though there may still be oil in the ground underneath a marginal well, the odds are slim that a producer will ever be able to make enough money off of that oil — even at today's prices — to recoup the costs of reopening it.

(4) The local schools are decimated. In Texas, most public-school funding comes from the property tax. For lands possessing mineral rights, the property values are based on a multiple of production. So when the wells are pumping, these lands have high property values. Once the wells are abandoned or plugged, these lands aren't worth dirt.

The drop in petroleum prices decreased the value of oil properties by about 40 percent and gas properties by about 15 percent between 1998 and 1999. This blew a big hole in these oil-dependent districts' bottom lines — many of which saw their property values fall 10 percent, 20 percent, even upwards of 50 percent in one year. The Texas Legislature added $133 million in the state's 2000 budget to offset the local property-tax losses these districts suffered. (Only $100 million was used, though, and the return of higher increased production — helped by the severance-tax relief — should curb the need to use the rest.)

Also, when production goes away, pretty soon the workers and their children go away. And when the children go away, the state's financial aid to that school district is cut almost immediately. Over the long term, the oil-dependent districts would have faced a double whammy from declining state payments.

(5) The state's "Robin Hood" school-finance formula is endangered. Dozens of school districts are considered "property rich" because of their mineral wealth. The higher a district's property value per student, the more local tax revenues the state confiscates and shifts to "property poor" districts. In fact, only a handful of "property rich" districts are so because of ritzy neighborhoods; most are due to bubblin' crude. Had production been permanently lost, the state's pot of "Robin Hood" money would have shrunk significantly; also, the school-funding pie would have to be carved to include slices for these formerly "property rich" districts.

The Legislature decided the best way it could revive the industry was to stop collecting the severance tax on "marginal wells" — those producing less than 15 barrels per day — until the price of oil got back up to $15 a barrel. The bill had authorized the tax relief through August (at an anticipated cost to the state of $45 million) but prices rebounded by May, meaning that only about $27 million of that amount was actually used. Nearly 6,600 of the state's 8,000 independent producers benefited from the severance-tax relief. "Big oil" got its share, but so did "mom-and-pop oil."

But why did Bush declare the bill an "emergency"? Under the House and Senate rules, no bill may be approved by one chamber and sent to the other during the first 60 days of the session without such an emergency declaration. The bill's framework required it to take immediate effect, and without Bush's emergency declaration, the bill would not have taken effect until September--too late to help many producers.

Severance-tax relief was a bipartisan effort, passing with only one no vote out of 15 Democratic senators, and only eight no votes out of 78 Democratic representatives. Cutting the severance tax is coming to be viewed here more as a rural economic-development issue. In fact, there is a growing sentiment among state leaders that Texas ought to get rid of the tax altogether.

Finally, "children's health vs. big oil" is a bogus linkage. Bush and the Democrats in the Legislature disagreed at first on how many children the CHIP program could cover within available resources. In the end, Bush relented and gave the Democrats what they wanted. And whether the CHIP bill had been signed in March or May, it still wouldn't have been implemented until September because those funds weren't going to be available until then.

When one of a state's major industries is drowning, you throw it a lifeline. That is what Gov. Bush did last spring, and had Al Gore the good fortune to become governor of our state, he had better have done likewise.

Under those conditions, most people would agree that giving up $27 million in tax collections was worth it. But when, during this campaign, have the facts ever gotten in the way of a good yarn?