The Legislature’s management council decided in September to form a select committee on coal bankruptcies — an appropriate move but by no means Wyoming lawmakers’ first stab at improving the complex tax valuation and collection procedures that have dogged state and local government for years.
The Joint Revenue Committee has wrestled with mineral taxation virtually every year since 2006. Its focus has shifted slightly over the years, and the new committee certainly has a different set of objectives and conditions as well.
But there are valuable lessons to be gleaned from examining previous efforts: insights about compromise, industry buy-in, local government support, the role of finance interests and timing.
The new select committee will consider ways to protect the inevitable victims of bankruptcy, including employees likely to suffer wage and benefit shortfalls — not to mention loss of employment. Minutes of the panel’s first meeting, however, indicate that its initial focus is securing the millions of dollars in tax revenue that have already been lost and the millions more sure to become vulnerable as the coal industry continues its transition.
The Task Force on Mineral Taxes, a committee authorized by the legislature for the 2015-2016 interims, laid some indispensable groundwork toward that end. Standing committees at the time, such as Joint Revenue, lacked a clear understanding of mineral taxation. Its nuanced and unique processes were utterly foreign to many members — a fact exacerbated by turnover in committee membership.
Thus the Task Force on Mineral Taxes was formed with its focus on streamlining and simplifying the process of evaluating the gross product of coal, oil and gas produced in the state. It’s very difficult, after all, to tax something fairly if you can’t evaluate it. A related concern also quickly emerged: the difficulty of tracking and collecting gross product or ad valorem taxes. Oil and gas insolvencies, transfers, trades and mergers were the primary culprits at the time, causing all kinds of collection headaches for counties and the state.
Coal producers — being large concerns and few in number, with stable ownership patterns at the time — were of secondary importance when it came to delinquent and uncollectible taxes. The hundreds of oil and gas operators were, in contrast, difficult to track and monitor by counties and the state revenue department. Because government liens weren’t at the front of the line to get paid, county treasurers were often not even notified of those properties changing hands or becoming insolvent until after the fact.
To make matters even more challenging, liens at the time were not perpetual — they did not migrate to the buyer of the mineral property. Thus, it was common for outstanding ad valorem taxes to simply become non-collectible once the mineral property changed hands.
The task force immediately identified the lack of state and local government lien priority on mineral properties as a fundamental problem.
This carve-out for minerals is an exception in Wyoming law. The chapter in Wyoming Statutes dealing with lien priority made clear that state and local taxes were superior to any other liens placed on property, except for mineral property. With minerals, the first lien had been reserved for financial and other credit interests.
Because tax liens are and always have been first priority for other classes of property, collecting associated taxes due from these properties has never been problematic for counties. This is why industrial, commercial and residential properties that faced foreclosure or bankruptcy or ordinary property transactions have — unlike mineral properties — resulted in virtually no outstanding and uncollectible ad valorem tax obligations over the years.
The proposed legislation that resulted would have removed the priority exception for mineral property. As expected, banking and finance interests actively lobbied against it. Ultimately the measure was not enacted. Similar bills by individual legislators were advanced in ensuing years. None were adopted.
However, a similar bill, Senate File 118: Tax liability mineral production did pass during the 2019 legislative session. It will be effective for future years, but is subject to a phase-in period that will not conclude until January of 2021. The issue now is whether its tardy enactment will be helpful for tax collections when coal mines close or change ownership between now and 2021. SF118 also ensured that tax liens survive property transfers. This is very important. Outstanding tax obligation will now follow the property rather than evaporating when the original owner steps away.
The task force also spent considerable time in 2016 working on a process for making ad valorem taxes due and payable on a monthly schedule similar to the state mineral severance tax — a topic that reared its head again when the new select committee held its first meeting in October.
Because ad valorem taxes are not due until about 18 months after the mineral was actually produced, collection of these taxes becomes problematic when mineral property owners experience financial stress. The lag in collections, combined with the heretofore lack of county tax priority, result in cash-flow-challenged companies being tempted to use funds generated from past production — money that should be set aside for taxes — for current operations and debt service.
Magnifying the problem is the fact that by the time a company becomes delinquent on their 18-month-old ad valorem taxes, an additional year and a half of untaxed production has likely already occurred. In this way, companies can enter bankruptcy owing taxes on two or more years of production.
The revenue committee in 2016 prepared House Bill 64 – Monthly payment of ad valorem tax on mineral production to synchronize the ad valorem tax payment schedule with the state severance tax. It initially enjoyed the support of oil and gas interests as well as coal companies. However, as the saying goes, “timing is everything.” And timing proved to be the undoing of the effort. By the time the budget session started in February of 2016, the coal industry was facing economic challenges due to decreasing demand caused by a warm winter, one new coal company insolvency and various other market factors.
Subsequently, extreme pressure was placed upon chairmen of the task force — including myself — to not proceed with the committee-approved bill. Coal industry lobbyists led the charge. Ironically Cloud Peak Energy, the leader of this effort, went bankrupt in 2019 leaving the state and Campbell County on the hook for delinquent taxes. Lobbyists’ main argument at the time was that if the bill proceeded, it would send an alarming message to the financial markets that the coal industry was in crisis. To further dim the prospects of thelegislation’s success, Campbell County commissioners wouldn’t support the bill without the blessing of the coal industry.
At the time the oil and gas producers were still in favor of the bill and the simplification that would result from ad valorem taxes and severance taxes being remitted at the same time. However, it was determined a host of additional problems would occur if a different tax policy carved out for one mineral, differing from other minerals. Accordingly it was the consensus that it was best to not advance the bill during the short budget session of 2016.
One can’t help but speculate on how today’s coal bankruptcies and ownership changes would have turned out from a fiscal standpoint had this bill passed in 2016.
The next attempt to shorten the ad valorem tax lag came from the Joint Revenue Committee during the 2018 interim. That bill was, in many ways, a compromise. It offered an incentive for the mineral industry to support the measure.
The original bill had significant potential cash-flow implications for companies during the transition period. During the phase-in, taxes would be due on both current production and previous production.
The 2018 bill contained an optional multi-year phase in and the opportunity for a 10% discount on past production taxes to cushion the financial impact on mineral producers. Local governments, it was reasoned, could easily absorb the 10% reduction in revenue for a year because of receiving, in effect, double amounts of tax revenue over the phase-in period.
The 2018 measure also met industry resistance, though, and ultimately failed to advance. Here too there was an element of trade off. Many preferred to secure lien priority, which was passed in 2019.
If the new select committee is going to succeed in changing the tax-collection schedule, it’ll likely need an even larger incentive discount. Legislators and other government officials hopefully will consider this since once the phase-in is complete they would enjoy the perpetual benefit of monthly tax remittances.
The monthly payment procedure now contemplated by the select committee in conjunction with the lien priority change successfully enacted in 2019 will do much to solve tax delinquencies in the future. But for the next two or three years, much uncertainty remains given the current coal environment.