Studies: Drilling taxes, fees may not have much impact on gas industry

<em>(Crashworks, Flickr)</em>

(Crashworks, Flickr)

Even as domestic drilling for natural gas has dropped off dramatically due to the recession, more and more states and local governments are looking to up taxes on the industry in order to bolster desperately depleted budgets.

According to an article
in Monday’s Wall Street Journal, California and Pennsylvania are the latest states weighing a so-called “severance tax” on gas that’s extracted from the ground. The WSJ story mentions Colorado’s severance tax — one of the lowest of the western gas-producing states — and Amendment 58, a failed attempt last fall to increase the tax by removing a property tax exemption:

The oil industry has already beaten back some proposed tax increases. An effort to raise Montana’s severance tax died in the state legislature this year, and in November voters in Colorado voted down an oil-tax increase after a high-profile ‘vote no’ campaign funded by the industry.

Energy interests argue that higher taxes would lead companies to shift their drilling elsewhere, leading to lost jobs and lower tax revenue. And they say reduced drilling could lead to greater dependence on imported oil and higher energy prices.

In fact, industry forces in Colorado compiled a more than $10-million war chest to defeat Amendment 58, but some studies have shown severance taxes don’t have that much of an impact on where companies drill. The WSJ quoted Headwaters Economics, which last year provided similar information to the Colorado Independent in the wake of Amendment 58’s defeat:

Advocates for increased taxes argue that taxes play a smaller role in companies’ drilling decisions than factors such as how much oil is present or how difficult it is to produce. A study released last fall by Headwaters Economics, a Montana-based nonprofit, found that Montana and Wyoming, despite widely differing effective tax rates, haven’t seen much difference in drilling activity.

It doesn’t seem to be affecting where companies drill,’ Mark Haggerty, one of the study’s authors, told the WSJ.

That applies to local government fees, as well. Haggerty recently told the Colorado Independent he was not aware of any other counties in the nation, other than Colorado’s Rio Blanco, charging impact fees on a per-well basis.

The threat of such fees — Rio Blanco has charged just under $18,000 per well for just under a year — shaped last year’s bitter Garfield County election, where industry forces spent heavily to defeat two Democrats interested in imposing similar fees.

But according to Jeff Madison, Rio Blanco County’s director of planning and impact fee administrator, the industry hasn’t exactly been chased off by the new county fee, which is levied against all forms of development, including residential and commercial buildings, but pulls in about 98 percent of its revenues from the oil and gas industry.

Rio Blanco’s impact fee garnered $2.44 million in 2008 after going into effect in mid-July, and as of May had pulled in another $1.55 million in 2009 — most of which will be spent on county roads and facilities.

Madison said that last year at the peak of the recent gas boom there were about 14 rigs in operation in the county, and that number is only down to nine, seven of which belong to ExxonMobil. Also, Madison said three companies, including ExxonMobil, have built major gas-treatment plants that are just now coming online.

“Our big one is ExxonMobil right now and they haven’t cut back one bit, and the other thing that has stabilized us a lot is that … we’ve had close to $2 billion in infrastructure put in in the last two to three years, which is just now being completed, some of which hit the impact fee for this year and so that’s kind of mitigated it too.

“The companies have decided they like to build gas plants up there in the middle of Rio Blanco County, so that’s helped a lot. Of all of the counties along the line, from Mesa, Garfield, Rio Blanco, Moffat and on into Wyoming, we have the lowest property taxes.”

That lower property tax rate was one of the reasons the Rio Blanco county commissioners decided to implement an impact fee, but some critics say that even the high property taxes in other counties don’t cover the impacts of the industry because of the exemption in the severance tax.

“Our tax structure here in Colorado has been so minimal for so long that there just isn’t enough money to sustain the kinds of costs occurring,” petroleum accountant Mary Ellen Denomy told the AP last year.

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About the Author

David O. Williams

is an award-winning reporter who has covered energy, environmental and political issues for years. His work has appeared in the New York Times, Chicago Tribune and Denver Post. He's founder of Real Vail
and Real Aspen.

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