The legislature should carefully study raising severance taxes on oil and gas production, bringing Colorado into line with nearby states and producing an enhanced revenue stream for such needs as higher education and state building maintenance.
There is certainly room for an increase that would not undercut Colorado’s competitive position with its oil- and gas-producing neighbors. Because of a property tax offset, Colorado’s nominal 5.7 percent tax is actually lower than Utah’s 4.5 percent. Oklahoma levies 7 percent, New Mexico 9.4 and Wyoming 11.25. Wyoming collected $683.2 million in severance taxes in 2004, almost six times Colorado’s tax. Most of the difference comes from Wyoming’s higher tax rate.
Even without an increase, a group of legislators led by Sen. Chris Romer, D-Denver, is considering blending the state’s existing severance tax with a separate fund of federal leasing payments to convert what has been a wildly fluctuating revenue source into a reliable stream of cash.
In recent years, severance tax revenues have been highly volatile. The state received $57.1 million in 2002, but just $32.3 million in 2003. The total jumped to $115.9 in 2004, hit $146.4 million in 2005 and a record $211.8 million in 2006. But collections are expected to drop to $100.4 this year million, then climb back to $151.3 million in 2008 before leaping to $275.7 million in 2009.
The wild ride has two causes – widely fluctuating energy prices and Colorado’s Byzantine tax structure. Since Colorado nominally collects a 5.7 percent tax on gross revenues, rising energy prices in the wake of Hurricane Katrina account for most of the jump in severance collections in 2006.
Now, wholesale energy prices are falling and projected severance tax collections are also headed south. But the earlier rise in energy prices also triggered an increase in the property taxes energy companies now pay to schools and county governments – and the state allows energy producers to deduct 87.5 percent of their local property taxes from their state severance taxes. Thus, in many cases, the nominal 5.7 percent state yields only a net 2 percent or less.
State severance taxes are collected only from operations on privately owned lands. – which means they are only about half the story of what Colorado collects from its mineral wealth. The federal government owns about 30 percent of the land in Colorado and collects a 15 percent royalty from oil and gas produced on that land. The feds split that royalty with the state 50/50.
Those federal leasing payments have climbed sharply since 2002, when Colorado received $44.6 million. The state share was $50 million in 2003, $79.4 million in 2004, $101 million in 2005 and $144 million in 2006. The state expects its share of federal leases to dip to $131.1 million this year, before climbing to $182.8 million in 2008 and $203.4 million in 2009.
The state currently administers its severance tax payments and federal leasing payments through two separate funds – each with its own complicated formula allocating money to various state and local needs. But as the graph accompanying this editorial shows, when federal lease payments and state severance taxes are added together, they have been much more predictable than the state share alone. That fact prompted Romer to propose blending the two revenue streams. After ensuring that existing revenues for such such needs as aid to local governments impacted by energy developments are continued, Romer wants to earmark future surpluses in the combined fund to pay off a $950 million bond issue.
Voters would be asked to approve the bond issue, and if they do, Romer wants to earmark $500 million for non-highway needs in capital construction – especially on college campuses whose funds were slashed during the 2001-05 state fiscal crisis. While Referendum C has now eased state budgets on the operating side, almost all the new revenue it provides for capital construction is earmarked by existing law to highways.
In addition to the money for new buildings, Romer wants to allocate funds to repair and wupgrade buildings whose routine maintenance was deferred during the budget crisis. He also wants to earmark $100 million for local communities, mostly on the Western Slope, which may need more roads, schools or other facilities as a result of expanding energy development. Finally, Romer would use part of the bond issue to pay for some K-12 school construction the state promised in order to settle a lawsuit.
Romer’s plan only averages out existing revenues – it is not a tax increase. It could, however, be blended with a number of plans to increase the effective state severance tax by one means or another.
Either long-term bonds or a tax hike would have to be approved by voters. Given Colorado’s faltering higher education funding, crumbling state buildings and the need to protect the Western Slope in the face of surging energy development, we hope a severance tax issue will be framed in time for the November ballot.
