Bill would ease taxes on coal, increase taxes on oil & gas
by 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 dustin@wyofile.com. Follow Dustin on Twitter at @DBleizeffer
If you enjoyed this story and would like to see more quality Wyoming journalism, please consider supporting WyoFile: a non-partisan, non-profit news organization dedicated to in-depth reporting on Wyoming’s people, places and policy.
REPUBLISH THIS STORY: For details on how you can republish this story or other WyoFile content for free, click here.
I’d like to add a historical eprspective here. The Powder River Basin coal seams are not the exclusive province of Wyoming. Au contraire, there is more mineable PRB coal in Montana than Wyoming. So why wasn’t it mined to an equal or greater extent than Wyoming’s deposits?
A good case can be made for what happened when Montana completely redrafted their state Constitution in 1972. Montana really embedded some environmental policies and revenue policy into their rulebook at that time. Montana decided to set their Coal Severance Tax at a royalty of 30 percent. Wyoming decided on a rate of 15 percent. Wyoming also made it a lot easier to fire up a coal mine at the state level. A couple eyars later we were building the Dave Johnson and the Jim Bridger powerplants, and each had their associated coal mine. All Montana was able to muster was the Colstrip mine and powerplant near Decker MT , barely across the border from Wyoming.
So basically due to a combination of factors, severance tax variance being just one, coal mining took off in Wyoming but stalled out in Montana, even though Montana had the larger deposits that were easier to get to and the infrastructure to move it ( Does anyone remember the infamous proposal to build a huge coal slurry pipeline to ship Wyoming coal east in tubes of carbon slush ? ). Wyoming made it easy for the coal business to get rolling; Montana put up some regulatory bumps.
It’s all too easy to say it was the difference in severance taxes that made Wyoming into King Coal and orphaned Montana. I think we can all agree that a 30 percent royalty is a wee bit too much for coal, but let’s not forget tha the severance rate was 15 percent in Wyoming for a while, then 10.5 percent, then 9 percent, and now seven . ( I seem to recall it was even lower for a while… maybe 4.5 percent ??? Correct me, please )
Frankly , Wyoming needs to raise the coal severance tax back up to 10 percent, or maybe a little more. While we can stills ell the coal at all. It is absolutely true that raisinf taxes does not necessarily impede or dissuafe production, as the Shelby Gerking study showed. The Wyoming LEgislature commissioned that study , and when it came back showing that taxes were not a disincentive to coal mining, the Lej promptly buried that study and it is all but verbotën to speak of it these days.
Wyomng’s coal severance tax needs to be elevated back to 10 percent. Now. Barlow and his ilk don;t get it, being industry puppets. They are not permitted to think in that direction by their handlers at King Coal, IMO. But the economics simply do not support their contention on coal taxes being a linch pin of productivity, when in fact it is market forces that move the coal, and the severance tax just travels along with that.
This bill shows an amazing lack of experience and depth on the part of it’s sponsors. It is a poorly executed attempt at coming to the aid of a coal market which has been battered by an administration whose lack of economic functionality is even greater. A large percentage of oil and gas in Wyoming comes from small independent companies which have weathered years of abuse in the form of ever increasing production costs. These costs stem from an ever increasing burden of complying with over bearing and unnecessary Federal environmental regulations and taxes, and cow-towing to an ever increasing and already bloated tax system. Talk about choking the golden goose. It is precisely this type of legislation which causes production to leave and lose interest in Wyoming.
Please educate yourself before making comments such as “coal companies do not pay enough in taxes.”
Dan Neal’s comments in this article are right on. Wyomingites are lucky to have a watchdog group like the Equality State Policy Center.
The coal isn’t going anywhere, so why cut these already heavily-subsidized industries a break that they don’t need? The coal belongs to the people, not the companies. I say RAISE the severance taxes on all natural resources to 15%. These are finite resources that will never regenerate in our lifetimes, so we need to quit subsidizing their extraction and begin generating as much revenue as possible to bank for future generations when these resources are exhausted.
Coal companies are waiting instead of bidding on federal coal for reasons unrelated to marginal severance tax rates. The BLM has jacked up the cost of bidding to the point that companies must bid and commit tens or hundreds of millions of dollars for many years, in an uncertain market. “Stranded capital” is the term they use. Coal operators are postponing bids until they have to get the reserves to keep running. Changing tax rates on minerals simply increases uncertainty for everyone.