SEVERANCE TAX & FEDERAL MINERAL LEASE REVENUES IN … · 2020. 8. 17. · Severance Tax •Taxes applied to non-renewable resources severed from the ground- tax the extraction or

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

[email protected]

http://www.colorado.gov/demography

mailto:[email protected]

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)


Colorado Gas Production (2012)


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


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


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%



$(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


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


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:


•Population

•Road Miles

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


Population 34% 34% 34%

Colorado Employee Residence

Reports 33% 33% 33%

Road Miles 33% 33% 33%


How the Federal Mineral Lease Distribution Works

County and Municipal




•Federal Mineral Lease Generated


Distribution of the county pool to county/municipalities based

on countywide share of the following factors:


•Population

•Road Miles

Direct Distribution Grants and Loans


Federal Mineral Lease RevenueCounty Pool

Factor

Recommended Weight


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


Population 34% 34% 34%

Colorado Employee Residence Reports 33% 33% 33%

Road Miles 33% 33% 33%


How the Federal Mineral Lease Distribution Works

School District




•Federal Mineral Lease Generated


Distribution of the county pool to school districts based on

countywide share of:

•Pupil Count

Direct Distribution

31



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


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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Documents

SEVERANCE TAX & FEDERAL MINERAL LEASE REVENUES IN … · 2020. 8. 17. · Severance Tax •Taxes applied to non-renewable resources severed from the ground- tax the extraction or