Oil and the North Dakota Sales Tax Outlook

The continued decline in oil prices raises the prospect of further budget issues in North Dakota. This is distinct from the COVID-19 related issues that may be hitting the state too. Recall the great declines in the 2015-17 biennium compared to the 2013-15 biennium.

There is a bit of nuance to this situation. There was an enormous price decline for WTI from $105.79 in June of 2014 to an eventual low of 30.32 in February of 2016. More recently we witnessed a price decline from $63.27 on January 6, 2020 to $21.86 today. The price drop is drastic and important for budget reasons related to oil taxes. There is however another issue.

Another portion of the issue comes from the labor force employed in and around the oil economy. These workers buy significant amounts of goods and services. You can look at labor force data, or you could look at rig count. One reason many missed this issue last time was that oil production stayed relatively consistent, but you could see the issue with a large drop in the rig count. This brings sales and use tax collections into the discussion. So back to the earlier biennia.

In the 2015-17 biennium the sales tax collections came in at $1.7 billion, more than $750 million less than the prior biennium’s value of nearly $2.5 billion. That was a 30.7% decline in the sales tax. There were even bigger percentage declines in the corporate income tax and the individual income tax. In all the state experienced a 29% decline in revenues. With oil prices declining again to levels not seen in multiple decades it is of course a relevant discussion and analysis again. The connections between sales tax collections and oil prices can be seen in the graph below.

You can see the connection between the percentage swings in oil prices and in and the swings in tex revenues. So what does this mean?

I am continuing to refine the estimates right now but the preliminary results suggest the following connections between oil prices, real GDP in the state, and sales tax revenues. All these are with a base case of a 10% decline in oil prices. Recall that right now we are sitting at price declines of as much as 60% which makes this math somewhat terrifying.

A 10% decline in oil prices leads to around a 2% decline in real gross domestic product in North Dakota. Further the 10% decline in oil prices leads to around an 8% decline in the sales tax collections. There are many other situations at play right now.

The COVID-19 situation makes some of this difficult to evaluate independently. Reductions in trips to shopping markets may not completely add on reductions due to oil, but it likely cannot help. Policy responses may help reduce some of these impacts as well, especially going forward with checks sent to households. This is hardly a favorite policy, but it is difficult to see other interventions working nearly as well. Another question is about the likelihood of oil workers leaving. Many of the ones staying right now may be more likely to stay as many remained in North Dakota during the last downturn in the industry. This might allow for a faster recovery and also more labor for other openings in the state.

The economy, nationally and in the state, are going through a period of significant adjustment. There are going to be significant short run ramifications we need to address with policy and individual ingenuity. As more data and details become available I will continue to analyze the situation and post results here including some projections out into the near future.

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