State severance taxes on oil and natural-gas production will plunge 84 percent, to $40 million, in fiscal year 2010, which begins July 1.
That compares with $250 million expected this fiscal year, according to a forecast by economists at the nonpartisan Colorado Legislative Council.
A sharp drop in the price of oil and natural gas this year is largely to blame for the expected precipitous decline in severance taxes, said Steve Colby, a research contractor with the Colorado Department of Local Affairs, the agency charged with distributing half of the state’s severance taxes.
“This is worse than we expected,” he said. “We are being more thoughtful and constrained in our use of funds.”
DOLA distributes 15 percent of the severance taxes — which are paid on minerals removed, or “severed,” from the ground — to cities and municipalities, and 35 percent in loans and grants to specific projects.
The other half of the severance-tax money goes to the state Department of Natural Resources, which uses it to fund water-conservation, wildlife and environmental programs.
The direct payments from DOLA to Colorado communities are supposed to offset drilling’s impact on roads, schools and public services.
“If the projections turn out to be accurate, counties will continue to be in a fiscal pickle,” said Chip Taylor, director of legislative affairs at Colorado Counties Inc. “They may have to look for revenue someplace else or start to cut discretionary programs.”
Plunging severance taxes will hit cities such as Rifle in Garfield County that largely depend on the money to improve infrastructure damaged by energy development.
“It’s certainly not a heartwarming projection,” said Rifle Mayor Keith Lambert. “I wouldn’t have expected that extreme of a drop in 2010.
“But we have always been conservative in our budget since we knew we could not depend on severance-tax distributions.”
Rifle received more than $1 million in severance taxes in fiscal year 2008, compared with $405,831 in fiscal year 2007.
The city has suffered the vagaries of severance taxes in the past when an oil-shale bust in the 1980s dried up oil and gas revenues. Today, the city uses severance taxes only to fund capital projects and not to run its day-to-day operations.
Even so, the drop in severance taxes would put on the back burner plans to replace aging sewer and water lines, construct roundabouts to ease traffic congestion and build an entrance to Rifle from Interstate 70.
Garfield County, however, hopes the steep drop in severance taxes will be offset by higher local property taxes in 2010. The county received more than $4 million in severance taxes in fiscal year 2008.
Local property taxes are collected on the value of oil and gas production from two years ago, while severance taxes are based on production value three to six months prior.
So the steep decline in energy prices in 2009 won’t be reflected in property taxes until 2011, said Garfield County Assessor John Gorman. “We will feel a huge impact in 2011, unless something turns around,” he said.
Meanwhile, counties worry that the deficit-ridden state will use money from the severance-tax windfall in fiscal year 2009 for other programs.
“Anybody who has money in any state account that is not constitutionally protected,” Taylor said, “would be shortsighted not to be aware the state might need that money to meet the deficit.”
Gargi Chakrabarty: 303-954-2976 or gchakrabarty@denverpost.com
