North Dakota Revenue Forecast Comments
The legislative session is in high gear and on March 18th the OMB released what they are calling their March 2015 Revenue Forecast (found here). This is an updated revenue number for the legislators, and I think it comes as no surprise that some of the numbers were down, especially oil. Looking ahead to the 2015-17 biennium the forecast is for a decline in oil revenues by $869,745,374. That is on top of more than $100 million less in the remainder of the current biennium. Does this number seem plausible? Sure.
With oil prices down, and the market expectation is for prices to remain lower rather than recover towards $100 soon, this seems a natural prediction. The problem is this is almost too easy a prediction. We are talking about a predicted decline in oil revenue in the next biennium of 42.6%. Why do I say this is too easy? We really do not know a great deal about fracking and how the changes in price will impact the industry.
We heard time and again how fracking is different from the more traditional oil drilling in Texas and Oklahoma. So we really do not know how the industry will react to its first major price challenge. Will there be significant layoffs? There should be some employment decline certainly, but how many is an open question. While the benefits of the industry were clear they often seemed overstated, at least from a long-run perspective in North Dakota, and now it seems the pendulum is swinging too far in the other direction.
In my opinion the oil revenue is not even the most surprising number in the update. Despite the downturn in the oil industry the revenue update predicts an increase in sales and use tax revenue in the 2015-17 period of almost 15% when compared with the 2013-15 period. With a key industry in a state of flux, with others like agriculture going through some volatile times, this seem overly rosy to me. Where is this growth coming from?
The strength of the dollar is not going to attract further Canadian shopping at this time. Are new industries likely to create this growth in the next two years? I don’t see how. It does not even seem like it could be an income based argument. When you look at the numbers provided the individual income and corporate income taxes decline in 2015-17 when compared to 2013-15.
Revenue projections matter. They matter especially when a legislature is meeting and deciding spending priorities for the next two years. This one could be much clearer about underlying assumptions and models used to generate the estimates.