Impacts of Energy Development in Wyoming

Impacts of Energy Development in Wyoming

An extensive report by Headwaters Economics, an independent regional research organization, recommends that Wyoming follow Alaska’s example to revamp its severance tax formula and direct additional tax revenue to the counties and communities where most mineral extraction takes place.

“Some have argued persuasively that Wyoming ought to compare its tax structure not to its peers in the Intermountain West, but to Alaska, the only other state in the U.S. that relies as heavily as Wyoming on revenue from the oil and natural gas industry,” the report notes. (See WyoFile “Does Wyoming Get Enough for Its Mineral Resources.”)

In the 62-page report, Impacts of Energy Development in Wyoming with a Case Study of Sweetwater County (pdf), authors Julia Haggerty and Mark Haggerty argue Wyoming’s current formula distributes only a small percentage of the severance tax it receives to the local governments where the energy impact is greatest.

“Wyoming has the least favorable tax structure on oil and natural gas of anyone in the inter-mountain west,” Mark Haggerty said in an interview with WyoFile, “and yet, it’s the center of drilling activity.”

Headwaters Economics

Headwaters Economics

The report disputes the widespread notion that Wyoming’s counties and municipalities receive big bucks from energy development in their backyards.

“Despite the high production value of extraction in Sweetwater County,” the authors conclude, “return to the county through state severance taxes is a small part of total county revenue.” Following Sublette and Campbell County, Sweetwater is Wyoming’s third-highest producer of mineral revenue.

Yet, according to the report, Sweetwater isn’t getting much back:

“In 2007, state severance tax distributions (to Sweetwater County) of $444,866 made up seven percent of intergovernmental revenue, or ten percent of total revenue. Across Wyoming, the state returns only a small portion of total revenue to local governments (seven percent to counties and one percent to cities and towns in 2008 or $196 million and $25 million respectively).”

Mark Haggerty told WyoFile the researchers got the figure for Sweetwater Co. by stripping away all taxes or revenue not related to energy. He said the percentage of revenue that goes to cities and counties is often perceived as much larger than it really is because school construction, community college appropriations, and highway work — all highly visible — often have a high economic impact on individual communities.

“Relative to its peers, Wyoming does an excellent job of directing money toward education and long-term investments,” the report noted. “However, it has among the lowest rates of ‘direct energy spending,’ meaning it is directing less money than peers toward mitigating the immediate [environmental and social] impacts of the energy surge.”

This means short-term benefits but a failure to bring long-term prosperity and a “limited ability to find other paths to wealth.”

Headwaters Economics receives its funding from a variety of government and foundation sources. The non-profit organization choose Sweetwater County to study said Julia Haggerty, “because we wanted to get a sense of what was going on across the spectrum, from communities that are diversified to those where energy is the only show in town.”

Economists and policymakers often marvel at the amount of money Wyoming distributes to cities and towns.

Indeed. In 2006, Wyoming returned to cities and counties a total of $311,230,231 derived from oil, gas, and coal revenue, twice as much as New Mexico or Colorado.

Oil and Gas Revenues As A Portion Of Total Wyoming Revenues

Oil and Gas Revenues As A Portion Of Total Wyoming Revenues

The figure also is large compared to other states, said Mark Haggerty, because Wyoming produces so much more energy than its neighbors.

Distribution of Oil & Gas Revenues

Distribution of Oil & Gas Revenues

Yet on a percentage basis, Wyoming distributed only 11.3 percent of energy-derived tax money to counties and cities. Utah, by comparison, distributed 51 percent and 41.5 in Colorado.

The Haggerty’s analysis also shows how, despite the boom, Wyoming’s wages have stagnated. Sweetwater County earnings “per job in 2006 ($40,455) was below the value in 1979 ($42,775) at the height of the previous energy boom (numbers adjusted for inflation).”

Diversity In Industry Revenue

Diversity In Industry Revenue

“Higher-skilled, higher-paying service occupations have not taken root in most of the state. This helps account for Wyoming’s failure, despite high wages in natural resources and mining jobs, to sustain overall earnings.”

“Real earnings per job in 2006 are lower than they were in 1979,” the report noted, “and about $6,000 less than in Colorado today, which has successfully developed its high-wage service economy — average wages in the Colorado service economy are $10,000 higher than in Wyoming.”

“When compared to an area like Grand Junction, Colorado, Rock Springs (largest city in Sweetwater County) has failed to develop a diversified economy. This means in down times everything comes to a standstill except the trona mines,” said Mark Haggerty.

The overall gains, says the report, look good only in the short term. “Revenues from the energy surge are neither strengthening Sweetwater County’s fiscal health nor assisting efforts to improve long-term economic development. The county’s ability to keep pace with increasing service demands — housing, crime, and infrastructure — is mixed, and its ability to fund capital improvements is especially weak. Because new expenditures are in excess of revenue, the county, municipal government, and local institutions (such as schools and hospitals) must scramble to assemble critical funding from a variety of unreliable sources or downgrade their level of service provision.”

The report concludes: “Wyoming and Sweetwater County’s dilemma is this: fossil fuel extraction brings short-term benefits, but has failed to yield long-term prosperity and now is limiting the ability to find other paths to wealth.

“Can Wyoming and local governments look beyond the short-term benefits to secure a more stable and prosperous economic future? We think so and offer the following recommendations:

Target tax incentives to exploration and capture more revenue from the production phase of energy development.

“As in Alaska, Wyoming’s closest energy-producing peer-state in terms of dependence on minerals for revenue, this would result in new, and timely, revenue to mitigate local impacts and support increased investment in more lasting forms of economic activity without affecting industry activities in the state.

Direct more state revenue to counties and communities where extraction takes place to redefine the terms of their relationship to energy development.

“This investment would enable local governments to do a better job of protecting communities and neighboring landscapes from the damaging aspects of the resource development.”

Use energy revenue to spark economic diversification.

“Investing in infrastructure, education and renewable energy, for example, will broaden income generation across a variety of sectors and increase the economy’s resilience while positioning the state and local areas for stronger long-term growth.”

Protect Wyoming’s quality of life.

“Safeguarding air and water quality, hunting grounds and access, view sheds, and safe communities will pay dividends. For example, Wyoming has an innovative higher education program, but its impact is lessened significantly because so many young graduates leave the state.”

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Additional Resources:

Impacts of Energy Development In Wyoming, pdf document

Full State of Wyoming Department of Revenue 2008 Annual Report

WyoFile article, “Does Wyoming Get Enough for Its Mineral Riches? Severance Tax Reform in the Cowboy State”
WyoFile article, “What Alaska Did”
WyoFile article, “A Quick History Of American Severance Taxes”

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Published on April 20, 2009

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