Bill would ease taxes on coal, increase taxes on oil & gasby Dustin Bleizeffer
—February 4, 2014
A bill co-sponsored by a pair of lawmakers from the mineral-rich northeast portion of the state aims to adjust several tax rates and exemptions that would reduce the amount of taxes paid by the coal industry and increase the amount of taxes paid by oil and gas.
Rep. Eric Barlow (R-Gillette) and Sen. Ogden Driskill (R-Devils Tower) are co-sponsors of House Bill 66 “Severance Tax,” which would reduce the severance tax rate on coal while eliminating some tax exemptions for oil and gas. “The oil and gas industry is one of coal’s main competitors, and they’re getting taxed at a lower rate,” Barlow told WyoFile. “I want to examine the equitability of severance tax rates between hydrocarbons. In this case, coal and oil and gas are treated differently.”
The severance tax rate for coal produced from surface mines in Wyoming is 7 percent, and 3.75 percent for coal mined in underground operations. Barlow said he wonders why the severance tax rate for most of Wyoming’s mined coal is 7 percent, while the severance rate for oil and gas is 6 percent. In HB 66, Barlow and Driskill propose lowering the coal severance rate to 6 percent at surface mines, and to 3 percent at underground mines — a revenue loss of approximately $40.4 million in fiscal year 2015, $40.8 million in 2016 and $41.2 million in 2017, according to the Legislative Service Office.
The legislation would allow for another .5 percent severance tax rate discount on all federal coal lease tracts purchased after January 1, 2014, foregoing an estimated $18.1 million in annual severance tax revenue in years beyond 2017 — on top of the continuing $40 million-plus annual loss.
Barlow said the intent of lowering the severance tax rate is to create an incentive for coal companies to continue mining coal at or near current rates of production. Statewide coal production in Wyoming peaked at 467.6 million tons in 2008 and has declined to just below 400 million tons annually in recent years. Coal mining contributed an estimated $1.22 billion in overall state and local taxes in 2012, in addition to directly employing 6,900 workers, according to the Wyoming Mining Association.
For decades, coal has served as Wyoming’s steady mineral revenue source, helping the state weather the busts between oil and gas booms. So it was concerning for many state leaders when, for the first time in Wyoming history, a federal coal lease sale last summer in the Powder River Basin received no bids. That was followed by federal mineral managers rejecting another coal lease bid for coming in below fair market value. Barlow said those events spurred him to try to come up with incentives that might help convince coal companies to buy future coal leases and continue mining at a revenue-healthy pace in the state.
“Whether it’s enough or the right incentive, I don’t know,” said Barlow.
The question about whether adjusting mineral severance tax rates can effect production and jobs in the state is not new. The Equality State Policy Center (ESPC), a coalition of government watchdog, environmental and worker advocacy groups, has advocated for a higher severance tax rate on several occasions. Famously, a University of Wyoming study led by former UW economist Shelby Gerking in 2000 found that adjustments in severance tax rates — up or down — have negligible influence on production and jobs.
“We know that the severance tax has minimal effect on the coal that gets produced. The recent drop in production is related to factors completely unrelated to the state’s severance taxes,” said ESPC executive director Dan Neal. “I just don’t see how the state is supposed to make up that loss in revenue. Do we have to raise property tax to make up for this loss in revenue?”
The fact that the severance tax rate is different between coal, and oil and gas isn’t unusual. There are different severance tax rates between uranium and trona, as well, usually based on a whole set of market considerations for a given mineral. Neal said if lawmakers decide they want to see coal, oil and gas at the same severance tax rate, the ESPC would suggest raising oil and gas to coal’s current rate of 7 percent, rather than adjusting coal down to meet the lower 6 percent rate.
“Oil has been doing pretty darn well during the past decade, so if you apply that logic we ought to be bringing oil and gas up,” said Neal. The best approach, Neal added, is to avoid adjusting the state’s tax policy to fluctuating commodities markets. “We should establish what we believe is a fair tax rate and stick to it.”
Neal said his group would like lawmakers to consider raising mineral severance tax rates, not based on changes in the market, but based on the fact that Wyoming’s minerals are finite, and that the state only gets to tax them once. “The ESPC believes we’re not getting enough to satisfy our obligations to the next generations,” Neal said.
To that end, Neal said his organization does support sections of HB 66 that would eliminate some tax exemptions for the oil and natural gas industry. Currently, no severance taxes are applied to natural gas that is vented or flared, nor to natural gas volumes consumed in the production process prior to point of sale. The bill would apply a 1.5 percent severance tax rate to both categories, yielding an estimated $4 million annually, according to the Legislative Service Office. Applying the severance tax to natural gas volumes consumed on the lease site would make up $3.9 million of the total $4 million revenue increase.
The state’s justification for the current exemption on vented, flared and process-consumed natural gas is that the gas has “no value.” Barlow said he wants to challenge that notion, and he wants to have a discussion about whether it is the intent of citizens that the state apply a minimum severance tax rate of 1.5 percent on all severed minerals to go into the Permanent Mineral Trust Fund.
Bruce Hinchey, president of the Petroleum Association of Wyoming, said his organization has no position on the coal severance tax portion of HB 66, but it will oppose the section that seeks to apply a severance tax rate on vented, flared and process-consumed gas. Of process-consumed natural gas volumes, Hinchey said, “It has no value, it’s not been sold, and it’s not been (treated).”
Read House Bill 66
— Dustin Bleizeffer is WyoFile editor-in-chief. He has written about Wyoming’s energy industries for 15 years. You can reach him at (307) 577-6069 or (307) 267-3327, or email [email protected] Follow Dustin on Twitter at @DBleizeffer
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