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Lower Oil Prices Affecting State Budgets

Lower Oil Prices Affecting State Budgets

Lower Oil Prices Affecting State Budgets

While most of the news is about the coronavirus these days—for good reason—some state governments are finding their bottom lines may fall ill due to rapidly falling oil prices.

In April, the price for West Texas Intermediate crude oil, the benchmark for crude oil produced in the U.S., saw its May contract plummet to a new low: -$37 per barrel. Yes, that’s minus $37. Just the year before, in May 2019, WTI crude was selling at $71 per barrel.

An article written for the Tax Foundation, a leading tax policy center, finds some states’ lopsided dependence on oil revenues could prove to be a serious flaw in their finances. Ulrik Boesen reports the price of June contracts has improved somewhat in recent weeks, rebounding closer to the $20-a-barrel mark, but experts warn the gains may not continue for long.

If the downward slide continues, Boesen writes, it will have “a severe impact on the states that collect significant parts of their state revenue from oil severance taxes.” A double-whammy of low oil prices and the economic downturn from the coronavirus pandemic could give these states a lot to worry about.

Boesen finds two states in particular, Alaska and North Dakota, rely on oil-related taxes for much of their overall tax revenue. Alaska, for example, collects 50% of its revenue from oil severance taxes; a total of 81% of Alaska’s revenue comes from taxes levied on the oil industry.

North Dakota fares better, but only marginally, collecting 53% of its revenue from severance taxes. Other states pulling in significant tax money from the oil industry include Wyoming at 22%, and New Mexico at 20%. Wyoming and New Mexico, Boesen notes, also generate a hefty portion of state tax revenue from severance taxes on oil extraction besides the other taxes paid by the oil companies.

But there’s more than just these direct tax payments by oil companies to be lost. These states also collect state taxes from corporate and personal income taxes, property taxes and royalties—all related to the oil industry. And oil production frequently also supports vendors and service suppliers, which lead to more local jobs in the communities where they operate and more state taxes generated.

Boesen’s article spotlight’s Alaska and North Dakota since these two states are the most vulnerable to the current circumstances, but Boesen stresses other states with significant revenue from the oil industry could also experience fiscal distress as well.

No easy way out.

The April downturn marked the first time a West Texas Intermediate contract had entered negative territory. Boesen notes that it happened because the cost of drilling, extracting, and storing the oil outweighed the profit from selling it. The price decline was sparked by a price war between Saudi Arabia and Russia, and then simply made worse by a slump in demand due to the coronavirus.

Global demand is estimated to be down 30% because of the pandemic.

The crucial aspect of the oil production equation, Boesen writes, is demand. And demand—or lack of it—is what drives this change:

“The demand is key because some oil futures contracts are settled physically, which means that the owner of any contract will receive the physical oil. This fact added urgency to the market as May contracts, which traded at a negative value, expired on April 21. May contracts have to be settled in the delivery month (May) in Cushing, Oklahoma, where contract owners must take possession of the oil. However, refinery capacity across the country is down because demand is down, which means oil is simply sitting in storage in Cushing with no capacity to book any more local storage.”

To make matters worse, it’s not easy to turn off an oil well without damaging the well. That means production of oil continues even if there is no demand.

Looking ahead, Boesen observes that June contracts are currently trading in positive territory, supporting the idea that the cost of refining and storage of oil is what is driving the price of May contracts downward. Even so, if demand doesn’t increase while the storage situation remains the same, upcoming contracts could see similar pricing.

Alaska and North Dakota could be at risk.

The oil business has been very good to Alaska; in 2012, oil and gas production taxes generated $6.15 billion for the state. Oil-related rents and royalties brought in another $2.04 billion. Corporate income taxes from the petroleum industry supplied $568.8 million.

That same year, oil and gas taxes yielded $8.86 billion of Alaska’s $9.5 billion unrestricted general fund—accounting for 93% of the fund’s revenues.

The Alaska Oil and Gas Association estimates the oil industry supports more than 77,000 jobs in the state.

 More recent figures are much different, to say the least.

Boesen writes that this year, non-petroleum revenue stood at nearly $503 million while oil and gas revenue dropped from an inflation-adjusted $9.9 billion to a projected $1.5 billion.

The Alaska Department of Revenue had initially predicted oil prices would hover around the $60-per-barrel mark this year. But by March its Legislative Finance Division had scaled that guess back, saying lower prices would add $300 million to the state’s deficit in 2020 and $600 million in 2021. Boesen says even those numbers appear to be underestimates now.

Down south, North Dakota is also eyeing the financial fallout from historically low oil prices. The state’s 2019-2021 biennium budget previously predicted North Dakota would pull in nearly $5 billion in oil industry taxes, based on an estimated oil price of $48 per barrel.

The University of North Dakota now estimates price drops will cut tax revenue by 12%, but that calculation was made when oil was trading at $21 per barrel. If the price slump continues, the effects could be worse.

North Dakota did not institute a stay-at-home order to combat COVID-19, opting instead for a targeted approach that closed bars, restaurants, gyms, theaters and schools.

According to the state’s Department of Mineral Resources, production in North Dakota doesn’t have much room for growth. Boesen writes that means North Dakota—like Alaska—should start thinking about how to plan for a new era: one with reduced oil revenue.

Boesen concludes that Alaska and North Dakota are just two examples of how the pandemic and other economic factors can pair up to create a perfect storm for some states. “The impact on the oil industry is just one example in an unfortunately growing list of economic downturns. The industry supports tens of thousands of jobs across the country and this crisis could have a long-lasting impact on the communities supported by these jobs.”

Our thanks to Ulrik Boesen and the Tax Foundation for their original article.

Story provided by TaxingSubjects.com

IRS Issues “Plus $500” Last Call for SSI, VA Beneficiaries with Dependents

IRS Issues “Plus $500” Last Call for SSI, VA Beneficiaries with Dependents

IRS Issues “Plus $500” Last Call for SSI, VA Beneficiaries with Dependents

May 5, 2020, is the EIP-reporting deadline for SSI and VA beneficiaries with qualifying dependents.

The Internal Revenue Service today issued a “plus $500” last call for Supplemental Security Income and Veterans Affairs beneficiaries who can claim dependents. After May 5, they will not be able to use the Non-Filers: Enter Payment Info Here tool on IRS.gov to report qualifying children, possibly delaying the dependent-related portion of their Economic Impact Payment until next year.  

The reason SSI and VA beneficiaries need to report qualifying dependents by tomorrow is because their payments are about to be sent by the Treasury. “In order to add the $500-per-eligible-child amount to these [$1,200] payments, the IRS needs the dependent information before the payments are issued,” the IRS explained in the press release. “Otherwise, their payment at this time will be $1,200 and, by law, the additional $500 per eligible child amount will be paid in association with a return filing for tax year 2020.”

How do SSI and VA beneficiaries report dependents on IRS.gov?

SSI and VA beneficiaries can access the reporting tool by going to the IRS.gov homepage and clicking the Non-Filers: Enter Payment Info Here link in the upper left-hand corner of the page. When the Non-Filers page loads, users might have to scroll down to find the blue Enter your information button (Ingrese su información for those who prefer Spanish). They just need to click the button matching their language preference and follow the on-screen instructions.

How will SSI and VA beneficiaries receive their Economic Impact Payment?

According to the IRS release, Economic Impact Payments for SSI and VA beneficiaries will use the same method currently designated for their government benefits. Generally, they will receive the payment in one of three ways:

  • Direct deposit
  • Direct Express debit card
  • Paper check

Remember, the language in the IRS release seems to indicate that reporting dependents after the May 5 deadline will result in receiving the rest of the EIP with next year’s tax refund. If an SSI or VA beneficiary would prefer to receive all of their payment at one time, they need to report all eligible dependents as soon as possible.

Source: COVID Tax Tip 2020-50

Story provided by TaxingSubjects.com

May 2020 Enrolled Agent Exam Cancelled due to Coronavirus

May 2020 Enrolled Agent Exam Cancelled due to Coronavirus

May 2020 Enrolled Agent Exam Cancelled due to Coronavirus

The Internal Revenue Service says it had to delay the Special Enrollment Examination (SEE) tests for Enrolled Agents that was slated for May due to the coronavirus pandemic.

Prometric, the company that does SEE testing for the IRS has closed its testing centers in the US and Canada through May 31 because of the pandemic. Those who had tests scheduled in May will be contacted by the company to reschedule.

“If you have a SEE appointment scheduled in May, you should have received an email informing you that your appointment is cancelled,” the IRS website instructs. “A Prometric representative will try to contact you once by telephone to reschedule your appointment. If Prometric can’t reach you by telephone, they will reschedule your appointment and send you an email confirmation with your new appointment information.”

The IRS EA page recommends that testing candidates can call Prometric at 800.306.3926 or 443.751.4193 if the new date and time don’t work for them and to ensure rescheduling fees are waived. Those lines are open Monday – Friday 8 a.m. to 9 p.m. Eastern Time.

International testing is also on hold.

The EA web page also shows that the international testing window scheduled for June 15-29 has also been cancelled. International candidates can, however, schedule during the remaining windows, in August and November in 2020, and in February 2021.

The IRS stresses that all information about the examinations is subject to change “in the interest of ensuring the health, safety and well-being of SEE candidates as well as Prometric staff.”

Besides delaying examinations, the IRS has also decided to extend the two-year carryover period for SEE candidates. Generally, those who pass a part of the EA examination can carry over a passing score up to two years from the date they passed that part of the test. To give candidates more flexibility in testing during these uncertain times, the IRS has extended the carryover period from two years to three.

This applies to any examination parts that had not expired as of Feb. 29, 2020. Only those candidates who passed a part of the examination Feb. 29, 2020 or earlier, will now have three years from the date they passed a part of the examination to pass the remaining parts. For example, if a candidate passed Part 1 on Nov. 15, 2019, they now have until Nov. 15, 2022 to pass parts 2 and 3.

The IRS says SEE candidates with additional questions can call 800.306.3926 or 443.751.4193 for additional information.

Story provided by TaxingSubjects.com