Severance Tax Change Could Make Colorado $10 Billion Dollars Richer

You decide — $10 billion for Colorado’s roads, education, healthcare and growth impacts or $10 billion for the energy industry’s profit line? That’s the difference a change in severance tax rates could make in the next 30 years, according to a new report. Severance taxes are collected on oil and gas, coal, metals, methane and oil shale among other minerals and energy related products extracted from federal lands. The value of these finite minerals are “severed” from public lands and are taxed by federal and state governments because once these energy reserves are mined or drilled, those resources are gone forever.

Colorado is certainly no Wyoming or New Mexico. If we were, the energy extraction industries such as oil and gas and coal would have paid an additional one billion dollars over the last five years in severance taxes, according to the just released report “Torched and Burned: Why Does Colorado Subsidize the World’s Most Profitable Industry?”

“We are offering up our natural resources to the oil and gas industry at blue-light special prices,” said Randy Udall, Director of the Community Office for Resource Efficiency in Aspen and author of the report. He estimated that over 75% of the wells produce no severance tax at all because of the “Byzantine” severance tax structure in the state.

Although Colorado’s gross severance tax rate on oil and gas production is about 5%, the net rate can get closer to 2% because of all the extra tax discounts Colorado offers to the energy industry.

Wyoming and New Mexico’s severance tax rates are closer to 7% and that hasn’t seemed to hurt the extraction industry’s growth at all, Udall mentioned. He also stated in his report:

The current drilling frenzy is the biggest boom in state history. Since 1990, Colorado’s gas production has increased 500%. In 2006, oil and gas revenues reached a staggering $9.6 billion. By 2008, they may exceed $11 billion.

In 2005, for example, Colorado collected $132 million in severance taxes. In Wyoming, an identical amount of oil and gas production would have raised $382 million. In New Mexico, it would have brought in $479 million.

Experts forecast that 150,000 wells will be drilled here over the coming three decades. During that period, producers of oil, gas, coal, molybdenum, gold, and silver are likely to extract $400 billion of mineral wealth, a precious windfall that our current tax policies fail to reflect.

Under current state tax structures, severance tax revenues were around $200 million in 2006. Those funds were divvied up under the Department of Natural Resources to support the department, Division of Wildlife, state water projects, Department of Local Affairs grants and other programs. (Refer to chart.) Legislators hope to siphon off future severance taxes to pay for college campus upgrades and transportation projects.

Currently, a citizen’s working group and a special legislative committee are investigating if the state’s severance tax distribution policies are fair.

In the epicenter of oil and gas drilling in the state, towns like Rifle need more severance tax revenues returned from the state to mitigate the impacts of the booming energy industry.

“In the next five years, we are facing $68 million dollars worth of city projects to keep up with the population growth from oil and gas workers, yet in 2007, the City of Rifle received only $622,000 in state grants from severance tax proceeds,” Rifle mayor Keith Lambert remarked.

“It’s not near enough, so the cost of oil and gas impacts will fall on the backs of our residents,” Lambert said.

Udall estimated that Colorado is losing up to a million dollars a day because of its lax severance tax regulations. Instead of communities, government officials and legislators trying to decide how to split the small severance tax pie, he asked, “why not make the pie bigger?”

“That’s what the City of Rifle has wondered for several years,” Lambert said. He has been pleasantly surprised that conservation and citizen activists groups have now adopted that perspective.

“The legislators have few choices – they will either have to take funds away from energy impacted communities like Rifle or they will have to raise severance tax rates and eliminate discounts if they want to use severance tax to support other programs,” Lambert said.

In Wyoming, severance tax helps pay college student fees. In Canada, it subsidizes healthcare costs.

Faced with an industry that has a huge political clout and deep pockets, do Colorado’s legislators have the political will to change severance tax laws? Only time will tell.

For instance, the severance tax legislative and working committees were supposed to consider only how the funds were distributed. Any suggestions to increase severance tax rates have been met with some politically-charged deliberations.

Some committee members believe that increased tax rates on the energy industry would drive companies away from Colorado.

Udall disagrees. With the Rocky Mountain region being one of the few places that new natural gas fields in the U.S. are found and with new gas pipelines being built to lucrative East and West Coast markets, it is highly improbable that the energy industry is going to walk away from its investments and profits in Colorado, Udall pointed out.

“The state legislature will certainly be involved in the immediate next steps,” said Matt Baker, Executive Director of Environment Colorado. “Ultimately, though, it will be up to the voters to decide whether or not we should close these million dollar tax loopholes for the oil and gas industry.”

Because of the TABOR laws, it will most likely take a statewide initiative to determine the fate of the state’s severance tax. How will you decide? $10,000,000,000 for the state or add it to the energy industry’s bottom line?

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