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LATEST SUBMISSIONS

Understanding the value of energy taxes in local communities

Thursday, August 9 at 1:13 PM

This Speakout has not been edited.

By J. Greg Schnacke and Stan Dempsey

Recently, in the context of discussing the “allocation” of severance tax revenues, the existence of the ad valorem (property) tax credit against the oil and gas severance tax has come under criticism. Some have portrayed this credit as a “giveaway” to the oil and gas industry.

This assertion ignores the history of oil and gas taxation, and the important role that local ad valorem taxes play in Colorado. Over the past decade, six Colorado counties have received over $100 million each in mineral property taxes; another eight realized $50 million each. At the head of the pack, Weld County realized nearly $450 million in mineral property taxes — almost entirely from oil and gas production — compared to approximately $30 million in severance tax distributions and grants over that same period. This has enabled Weld County to build new schools and public facilities, balance its budget, and reduce the property tax burden on homeowners and businesses at the same time. Recently, Garfield County announced that it had built its largest reserve fund ever, again due to ad valorem taxes on oil and gas production.

This reflects a considered policy decision made by the legislature when it adopted the mineral severance tax in 1977 — to keep the bulk of the extraction tax at the local level. Property tax revenues automatically track rising production, and related industry activity. This is in contrast to other states, where the bulk of taxation is imposed by the state. For example, in Oklahoma, oil and gas is exempt from local property tax; instead, the state returns a portion of the relatively higher severance tax to help local governments address industry impacts.

In Colorado, of course, the local property tax on oil and gas is supplemented by returning 50% of the state’s severance tax receipts to local governments by formula distribution and grants for capital projects.

In this context, the ad valorem tax credit against the severance tax should be seen as a balancing mechanism that evens out local tax rates. At the low end, some counties’ tax rate is less than 10 mills, while it is over 40 mills in high tax rate counties. That is before adding in school, fire, library and other special taxing district levies. By providing a credit at the state level for local oil and gas property taxes, these wide disparities in tax rates do not translate into disincentives to investment in high tax rate counties.

Colorado should not turn away from this equitable sharing system between the state and local governments without careful consideration. If there is a problem in the system, it is with those counties that have not “debruced” local tax revenues. Then, rising oil and gas values drive down the mill levy, and an election will be required to increase it when oil and gas revenues decline. A statewide election to “debruce” oil and gas revenues could provide new income to both the state and local governments, without adding a new tax that could drive investment away from Colorado and result in higher energy prices for consumers.

J. Greg Schnacke is the executive vice president of the Colorado Oil & Gas Association. Stan Dempsey is the president of the Colorado Petroleum Association.

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