SEVERANCE TAX & FEDERAL MINERAL LEASE REVENUES IN … · 2020. 8. 17. · Severance Tax...

SEVERANCE TAX & FEDERAL MINERAL

LEASE REVENUES IN COLORADO:

STATE AND LOCAL DISTRIBUTIONS

State Demography Office

Colorado Department of Local Affairs

www.colorado.gov/demography

May 2014

Grant Nülle, Economist

Grant.nulle@state.co.us

State Demography Office’s

Core Competencies• Population

• Year-by-year Estimates

• Projections (out to 2040)

• Characteristics – age, household formation, ethnicity, etc.

• Economy – State, Planning Regions, Counties

• Employment estimates on an annual basis

• Job Forecasts (out to 2040)

• Base Industry analysis – Economic Drivers, Direct, Indirect, & Induced jobs

• Geographic Information Systems (GIS) mapping & analysis

• Census state data center

Natural Resources Production has Always been an

Important Part of Colorado’s Economy

Colorado Oil Production (2012)

Source: Colorado Oil & Gas Conservation Commission

Colorado Oil Production (2012)

Source: Colorado Oil & Gas Conservation Commission

Colorado Gas Production (2012)

Source: Colorado Oil & Gas Conservation Commission

Importance of Non-renewable Resource Taxation

• Non-renewable Resource Extraction generates “Rents” that can be

captured by Factors of Production and Governments

• Rents are defined in economics as a return to a factor of production that

does not affect her/his behavior.

• Provided Resource prices exceed producers’ operating costs, revenues

generated above the cost threshold (rents) could be taxed away without

affecting producer behavior – at least in the short run

• Attractive to tax; unlike capital, non-renewable

resources are immobile

• Severance Tax and FML are principal means by

which resources are taxed in the U.S.

Severance Tax• Taxes applied to non-renewable resources severed from the ground-

tax the extraction or production of oil, gas, and other natural resources

• 32 states currently produce oil and natural gas

• 29 States Impose a Severance Tax

• 3 States (NY, PA, MD) Impose an Impact Fee in lieu of Taxes

• 3 States (NC, ID, WI) – levy a severance tax on oil and gas production despite

lacking commercially viable oil and gas wells

• Taxation Methodology Differs by State

• Many States tax the volume of oil or gas produced

• Others (TX and WY) tax the value of produced oil and gas

• Two states - Colorado and Illinois - tax the gross income

from produced oil and gas

Severance Taxes & State Revenues• In many Energy-Intensive States, Severance Taxes comprise a large

share of State Revenues

• In 2013 3 States Derived 40% of Tax Revenues from Severance

• Alaska (78%), North Dakota (46%), and Wyoming (40%)

• Another 9 States Derived 6-14% of Revenues from Severance

• U.S. Average is 1.9%

• Colorado 1.3% in 2013; Peaked at 3.2% in 2009State Severance Proportion

AK 78.3%

ND 46.4%

WY 39.7%

NM 13.7%

WV 11.3%

MT 10.7%

LA 9.0%

TX 9.0%

OK 5.8%

NV 4.1%

KY 2.5%

UT 1.8%

MS 1.4%

CO 1.3%

Severance Tax Receipts are Inherently Volatile

Colorado Per Capita Severance Tax Collections were $33.74

15th Nationally in 2012

How it Works – The Severance Formula

State Oil and Gas Severance Tax Revenue =

Production Quantity - Small Well Exemptions Quantity – Govt

Owned production

* Oil or Gas Price

- Processing and Manufacturing (TPM) costs

* Tax Rate

- Property Tax Credit

How it Works – The Severance Formula

“Nerd Version”

SevRevFY t+1 =

O&GQuantityCYt *(1– SmallWellProdcution% CYt )

*(1– GovtOwnedProdcution% CYt )

* O&GPrice CYt *(1 – TPM%CYt) *SevRate

- 87.5% * Mill CYt+1* Assessment Ratio * ((O&GQuantity

CYt-1 *(1 –SmallWellProduciton % CYt-1)

* O&GPrice CYt-1)*(1 –TPM% CYt-1)

Key Aspects of Severance Tax

• Production from Low-Producing Wells exempt from taxation

• The exemption was increased significantly in 2000

• Currently 15 barrels a day for oil and 90 MCF a day for gas, with these averages calculated on an annual basis

• As much as 60%* of Active Wells exempt from taxation

• Oil and gas are taxed on a sliding scale based on gross income of any individual or entity receiving income from oil or gas produced in Colorado• 2% for gross income under $25,000

• 3% for $25,000 to $100,000

• 4% for $100,000 to $300,000

• 5% for gross income over $300,000

• At an average price of $75 per barrel for oil and $5 per MCF for gas, it only takes annual production of 4,500 barrels of oil and 60,000 MCF to reach the 5% tax class.

• In Practice, Applied Severance Rate is 5%

* Author’s Calculations Based on Colorado Oil & Gas Conservation Commission 2012 Production Summary

The Property Tax Credit

• Taxpayers are allowed to deduct up to 87.5% of Property Taxes Paid on

Assessed Value of Oil and Gas Produced

• The mill levy on oil and gas production is a sum of a number of mill levies imposed

by various taxing districts

• Assuming Applied Severance Tax Rate is 5%, the “Magic Mill Number” by

which a particular well would be exempt is 57.1 Mills

• Determining how much severance tax liability is created / not created

depends critically on the applicable mill levies at each well

• A well-by-well analysis, that incorporates every single overlapping mill levy, would be

needed to begin to estimate how many wells by jurisdiction produce severance tax

liability

Severance Tax Receipts are Inherently Volatile

Federal Mineral Lease

• Royalties, rents, bonuses derived from non-renewable resource

production occurring on federal lands and offshore blocks

• Revenue Distributions Differ According to Onshore/Offshore Status

• Onshore revenues shared 51% / 49% between Federal Government & States,

except Alaska which keeps 90%

• States keep 27% of Offshore revenues, $150M is deposited in the Historic

Preservation Fund annually, and the remainder goes to U.S. Treasury accounts

• Since 1982 Office of Natural Resources Revenue has collected and distributed

$264 billion; $14.2 billion collected and distributed in 2013.

Federal Mineral Lease Revenues • Onshore Royalty Rate is generally 12.5%

• There are exceptions e.g., sliding scale on older leases, reduced royalty rates on

certain oil leases with declining production, reinstated leases, etc.

• Rents are Derived from Competitive & Non-Competitive Leases of land

• Public lands available for oil and gas leasing be offered first by competitive leasing

via Bureau of Land Management

• Non-competitive leases occur only after no bids received at oral auction for 2 years

• Leases last 10 years and may continue provided thereafter provided a well is on the

lease capable of producing in paying quantities on it

• Non-competitive land rents are $1.50/acre each year for first 5 years &

$2/acre thereafter.

• Competitive bids must be $2.00/acre or more per year. These are the

“Bonus” Rents

Severance Tax Receipts are Inherently Volatile

Federal Mineral Lease - State Shares

• 37 states currently receive Onshore & Offshore FML

• 5 States Receive 90% or more of revenues

• Colorado Accounts for:

• 10.5% of the 47,427 total leases in effect

• 10.3% of 36.1 million producing acres

• 9.3% of the 23,507 producing leases

• 7.3% of 93,598 producing wells

• 11.7% of 12.6 million producing acres

3.9 million acres of federal land are under lease

in Colorado - That is approximately 1 out of every 6 acres of federal land

and 1 out of every 20 acres in Colorado

State 2013 FML $ Share

Wyoming 46.6%

New Mexico 23.9%

Utah 6.9%

Colorado 6.5%

California 5.0%

North Dakota 4.5%

Montana 1.8%

Louisiana 1.4%

Alaska 0.9%

Texas 0.8%

Severance Tax Receipts are Inherently Volatile

Severance Tax Receipts are Inherently Volatile

$(50,000,000)

$-

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

$300,000,000

$350,000,000

$400,000,000

$450,000,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Total Colorado FML Revenues by Revenue Source

Royalties Rents Bonus Other Revenues

Severance Tax Receipts are Inherently Volatile

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Colorado Total FML Revenuesby Product Type

Coal Natural Gas & Oil CO2 Other Products

Severance & FML Distributions

Per Colorado Statutes, Severance and FML are distributed to a number

of State and Local Government entities for a variety of purposes

The Department of Local Affairs (DOLA) administers the Direct

Distribution of State Severance Tax and FML revenue to counties,

municipalities, and school districts. This is accomplished through:

• Direct Distribution - counties, municipalities, and school districts

• In August 2013, over $47 million in annual Severance Tax and

Federal Mineral Lease funds were directly distributed to 502

Colorado counties, municipalities, and school districts

• Local Government Project Grants & Loans

Total State Severance Tax Revenue

50%

Operational Account

50%

Perpetual Fund

50%

Local Impact Fund

Department of Local Affairs

70%

Local Government Grant Projects

30%

Direct Distribution

50%

State Trust Fund

Department of Natural Resources

Colorado Energy Office*

*Annual $1.5 million from total gross receipts to Innovative Energy Fund through July 2016.

Source: DOLA, Energy and Mineral Impact Advisory Committee

Oil Shale

Oil Shale Trust Fund

Non-BonusIncludes Rents and

Royalties

(Non-Oil Shale)

48.3%

State Public School Fund

FY13 Cap: $70.3M

10%

Colorado Water Conservation

Board

FY13 Cap: $16.4M

1.7%

School District

Direct Distribution

(Dept. of Local Affairs)

FY13 Cap: $3.9M

40%

Local Impact Program

(Dept. of Local Affairs)

Bonus(Non-Oil Shale)

50%

Higher Education Maintenance and

Reserve Fund

50%

Local Government Permanent Fund

Federal Mineral Lease Receipts

in Colorado49% to Colorado

51% to Federal Government

Higher Education

Federal Mineral

Lease Revenue

Fund

Cap: $50M

Spillover

Spillover

50% Direct Distribution to

Counties and Towns

50% Grants to Local

Governments

Source: DOLA, Energy and Mineral Impact Advisory Committee

How the Severance Tax Distribution Works

County Pool Allocation

Based on the statewide share of the following factors:

•Colorado Employee Residence Reports (CERR)

•Mining and Well Permits

•Mineral Production

Direct Distribution Grants and Loans

Subcounty Distribution:

Distribution of the county pool to county/municipalities based

on countywide share of the following factors:

•Colorado Employee Residence Reports (CERR)

•Population

•Road Miles

Energy and Mineral Impact Advisory Committee

Source: DOLA, Energy and Mineral Impact Advisory Committee

Severance TaxCounty Pool

Factor *Recommended Weight

August 2013 Weight for 2012 Weight for 2011

Colorado Employee Residence Reports 40% 40% 40%

Mining and Mineral Permits 30% 30% 30%

Mineral Production 30% 30% 30%

* Each factor must be 30%, with remaining 10% at discretion of Executive Director.

Subcounty Pool

Factor Recommended Weight

August 2013 Weight for 2012 Weight for 2011

Population 34% 34% 34%

Colorado Employee Residence

Reports 33% 33% 33%

Road Miles 33% 33% 33%

Source: DOLA, Energy and Mineral Impact Advisory Committee

How the Federal Mineral Lease Distribution Works

County and Municipal

County Pool Allocation

Based on the statewide share of the following factors:

•Colorado Employee Residence Reports (CERR)

•Federal Mineral Lease Generated

Subcounty Distribution:

Distribution of the county pool to county/municipalities based

on countywide share of the following factors:

•Colorado Employee Residence Reports (CERR)

•Population

•Road Miles

Direct Distribution Grants and Loans

Source: DOLA, Energy and Mineral Impact Advisory Committee

Federal Mineral Lease RevenueCounty Pool

Factor

Recommended Weight

August 2013 Weight for 2012 Weight for 2011

Colorado Employee Residence Reports* 35% 35% 35%

FML Revenue Generated 65% 65% 65%

*35% maximum (C.R.S.34-63-102(5.4)(c))

Subcounty Pool

Factor

Recommended Weight

August 2013 Weight for 2012 Weight for 2011

Population 34% 34% 34%

Colorado Employee Residence Reports 33% 33% 33%

Road Miles 33% 33% 33%

Source: DOLA, Energy and Mineral Impact Advisory Committee

How the Federal Mineral Lease Distribution Works

School District

County Pool Allocation

Based on the statewide share of the following factors:

•Colorado Employee Residence Reports (CERR)

•Federal Mineral Lease Generated

Subcounty Distribution:

Distribution of the county pool to school districts based on

countywide share of:

•Pupil Count

Direct Distribution

31

Source: DOLA, Energy and Mineral Impact Advisory Committee

Severance Tax Receipts are Inherently Volatile

Competitive Grants and Loans

• Established in 1977, Energy and Mineral Impact Assistance Program assists

political subdivisions that are socially and/or economically impacted by the

development by non-renewable resource extraction

• Reinstated in FY 2013 after diversion of revenues to fund state budget deficits

in FY 2009-12

• Eligible entities to receive grants and loans include municipalities, counties,

school districts, special districts and other political subdivisions and state

agencies.

• Projects include -- water and sewer improvements, roads, recreation

centers, senior centers, local government planning, etc.

• Loans are available to assist communities with critical water and wastewater

improvements

Severance Tax Receipts are Inherently Volatile

Summary• Colorado is blessed with abundant non-renewable resources

• In addition to Property Tax, Severance and FML are important

revenue sources to the state and local governments

• Budgeting for the impacts of mineral and energy development

is imperative and challenging

• DOLA is a critical partner in distributing Severance and FML

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