Raising severance taxes won’t deter oil and gas drilling, says expert

(Photo/Pitel, Flickr)
(Photo/Pitel, Flickr)

This November, Coloradans will be faced with two ballot initiatives dealing with how the state collects and allocates taxes on the oil and gas industry.

Severance tax, so named because it applies to natural resources permanently severed from the earth, not only dominates part of the the state’s ballot, but also much of the political discourse this election season. Some fear that increasing taxes on the industry — as Gov. Bill Ritter’s Amendment 58 will do — will only scare off oil and gas companies or raise gas prices in Colorado.

Others see it as a way for Colorado to capture some of the riches rolling out of its wells. The state’s 1.9-percent severance tax ranks extremely low among neighboring oil- and gas-producing states, and if Colorado raises its taxes, it could bring in another $300 million in the next two years.

The other ballot measure, Amendment 52, will reallocate existing oil and gas tax to benefit the state highway system. While the ballot initiative has been pitched by conservatives as an alternative to Amendment 58, opponents say that since it doesn’t add existing revenue to the state’s coffers, it will do little to help the transportation system or other struggling programs.

As the dialogue around severance tax in Colorado heats up, The Colorado Independent spoke with Mary Ellen Denomy, an accredited petroleum accountant based in Rifle, Colo. Denomy audits oil and gas profits for three Western Slope counties — Montezuma, Rio Blanco and Moffat — and she talked to us about the myths and facts surrounding oil and gas in Colorado today.

TCI: Many say that increasing the severance tax will drive the oil and gas companies out of Colorado. Is this true?

MD: Oil and gas companies do not necessarily consider the tax rate a major factor when choosing where to drill and where to go for product. The case in point is that [Alaska Gov. and Republican vice presidential nominee] Sarah Palin raised the taxes to 25 percent in the state of Alaska, and there is nobody in the industry that doesn’t want to drill in the Arctic National Wildlife Refuge. That tells me these companies are willing to go there for product even though Alaska’s tax rate is the highest in the nation. Colorado is at the low end in terms of taxing oil and gas. If we were to raise our rates to bring us in line with Utah or Kansas, we would simply be in a comparable position to states around us. It is not going to deter oil and gas companies or make them go away. Because if they go to another place, such as Wyoming or New Mexico, they will be paying a higher tax rate.

TCI: Point taken. But some have argued that Colorado’s natural resources are difficult to extract, and so it’s unwise to unduly burden the oil and gas industries.

MD: It is not any less difficult to get the gas out of the ground in areas of southwest Wyoming or northern New Mexico, and yet the companies are still drilling in those areas. … The oil and gas companies all say the same thing: “If you do this, we will leave or go somewhere that is less taxing.” That is just not true. Oil and gas companies say the same thing in Wyoming. They tell people: “We are going to leave Wyoming because it is too expensive. We are going to go to Colorado instead.” But in Colorado they’re saying, “We are going to go to Wyoming because it is less complicated and less taxing there.”

TCI: So how does Colorado rank in oil and gas production as compared with neighboring states? And how does our tax rate compare?

MD: New Mexico is the top producer and they have been, historically. Wyoming is No. 2 and we are No. 3. The tax rate in New Mexico is 11.73 percent; in Wyoming it is 12.2 percent. And we are at an effective rate of 1.9 percent. … Again, you are looking at Alaska with a 25-percent tax rate. That is a primary point of production in the United States for the big guys like BP and Chevron. And that tax is no comparison with ours; you want to say our tax rate under your breath.

TCI: What do you think of Amendment 58? Will it impact small mineral owners and oil and gas companies differently?

MD: When you talk about mineral owners, no one wants their taxes raised. They are stuck paying the oil and gas tax, they pay county taxes and they have to deal with surface issues and clean up. Those folks get a stick in the eye. Amendment 58 has made an attempt to help them out. [If it passes, companies that make $300,000 or less on their wells won’t have to pay severance tax. All other companies will pay a flat 5-percent tax]. The additional money available will be used for water projects and scholarships. But there is a risk that the large oil and gas companies will want to make sure they don’t pay more taxes than they do now and will attempt to lower their county taxes by asking the state legislature to do that. It is up to the counties to maintain a strong voice at the legislature.

TCI: Oil and gas companies are fighting Amendment 58 tooth and nail and have dropped $10 million into defeating the measure. What do you make of that?

MD: It is a threat to our state to say, “Look, we want to be able to not pay taxes on our income.” If any other industry said this, like if the veterinarians said, “If you don’t lower our taxes or leave us be, then we will leave,” I am not sure that they would get the traction that oil and gas does. … If Amendment 58 passes, the oil and gas companies will lose $300 million out of $10 billion in profits. We are talking not a significant amount, and it is shared among 465 companies and 5,000 or 6,000 mineral owners. Of course the top ones are going to pay the majority. The top five are BP, Nobel, EnCana, Williams and Pioneer, and they will fight the hardest against 58. The industry has always been very adamant about change. They believe if one state does it, the other states will jump in line, like, “If they raise it in Colorado, they will raise it in Wyoming.” They fought an increase in severance tax in California, and they beat it.

TCI: What is another myth that you’ve heard about Amendment 58’s passage?

MD: Companies say: “Look at what you pay at the pump. You will pay more if this passes.” I would like to throw that back to the companies and say, “If we have only been charging a 1.9 tax rate, why have our gas prices been so high?” Maybe we should have gotten a discount at the pump for years because our tax rates are so low. The cost of gas is a totally unrelated issue that has to do with access and markets.

TCI: What do you think of Amendment 52, which does not increase severance tax revenues, but reallocates them to highway projects like I-70?

MD: I am from the Western Slope, but I try to be more inclusive when it comes to statewide issues. Part of the problem with Amendment 52 is it doesn’t seek any other sources to fund transportation. It takes money away from water projects. The Western Slope has survived on dirt roads but it can’t survive without water.

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