Unable to diversify, Legislature doubles down on energy

UPDATE: This story was updated late Monday. — Ed.

Lacking the political will to broaden Wyoming’s tax base and reduce dependence on the mineral industry, some worry the Legislature is placing ever-riskier bets to cling to the status quo and prop-up energy producers.

The legislative session opened with a lot of talk from leading lawmakers about the need to “modernize” the state’s revenue stream. But those efforts died with a whimper. Some touted tax reforms, like an effort to broaden the sales tax to capture revenue from a diversified economy, didn’t even get a committee hearing as leadership saw they didn’t have the votes.

But as new tax diversification efforts have failed, unstudied measures aimed at reviving the old means of funding state-government —  the energy industry — have advanced. Critics say they carry risks for Wyoming residents.

Proposals include two tax breaks which supporters say will juice production and ultimately lead to more severance tax revenue. The Legislature also continues to advance a measure to keep aging coal plants in operation even when private sector owners want to close them, and a bill directing a legislative committee to consider suing states that have blocked coal port development.

“We’re just hunkering down,” said House Minority Floor Leader Cathy Connolly. “And when you’re hunkering down, you’re not thinking about anything other than maintenance of the status quo.”

Opponents of these measures call them risky bets. In the case of the tax breaks, opponents say suggestions of production increases are oversold and the state will lose out on revenue.

In the case of the coal plant bill, a University of Wyoming economist and other critics say the Legislature is putting the state’s everyday citizens at risk of paying higher power bills to subsidize waning coal jobs.

But energy industry lobbyists know their industry continues to keep the state afloat even when energy markets are hurting.

When Petroleum Association of Wyoming director Pete Obermueller asked the House Revenue Committee to pass a severance tax break for producers, he pointed to the state’s failure to diversify its tax structure.

In 2016, the state suffered when the price of oil dropped. Production and revenues plunged together, Obermueller reminded the committee.

“Those of you who were here obviously know that,” he said, “because obviously we [the energy industry] pay most of the bills around here.”

Last summer, a new state report revealed that  an influx of workers and businesses in other industries wouldn’t generate enough tax revenue to pay for the state services they receive. Without accompanying tax code changes, economic diversification comes at a loss for the state, the study concluded.

Obermueller seized on the study’s conclusions to remind lawmakers that as things now stand only economic growth in the energy sector carries a positive fiscal impact for the state. Unlike blockchain businesses or data storage centers, a tax break designed to spur oil and natural gas production will generate more revenue than it costs, he said.

“We’re talking about economic development for an industry that actually does economic development,” Obermueller said.

The state’s financial risks are growing as the Legislature struggles to broaden the tax base, leaving it ever-more vulnerable to downturns in the fossil-fuel industry.

Though still flush with deep savings accounts, the Legislature is spending those down without viable alternatives to replace them, according to the Legislative Service Office’s chief fiscal analyst.

“We are burning through cash,” LSO Budget and Fiscal Division Administrator Don Richards told minority party lawmakers on Wednesday, when he addressed the Democratic Caucus during its weekly meeting. Though lawmakers will still put millions into savings this year, that amount is slowing, Richards said.

“As a state we are spending our savings and we are not saving as much,” he said.

Protecting coal plants

Lawmakers appear more dedicated to fighting for the coal industry than finding replacement revenue streams as it continues to decline. On Wednesday, a Senate committee declined to take a vote on a corporate income tax projected to raise $45 million a year for schools.

On Thursday, the House advanced a bill to keep aging coal plants in operation. The Senate advanced a bill to set aside funds for a lawsuit against West Coast states that won’t allow coal ports.

“Enough is enough from our neighbors on the West Coast,” said Sen. Tara Nethercott (R-Cheyenne) as she spoke in favor of the lawsuit bill. “It’s time for us to be able to educate our children.”

But another Cheyenne senator argued that coal companies weren’t asking the state to file such a lawsuit and were engaged in their own. The Senate was making noise on behalf of coal for show, Sen. Affie Ellis (R) suggested.

“I think we’re trying to score some political points and act like we’re doing something,” Ellis said.

The bill would also return the state to a poor practice of hiring outside attorneys instead of using the Wyoming Attorney General’s office, Ellis said. House Bill 251 – Coal export terminal litigation, sponsored by Rep. Chuck Gray (R-Casper), would set aside $250,000 for legal action.  

Another coal bill carries a much larger fiduciary risk.

Senate File 159 – New opportunities for Wyoming coal fired generation seeks to protect aging coal plants from closure by forcing utility companies to look for a new buyer before shuttering money-losing operations. Then, Wyoming utility companies would have to buy power from the new owner. The bill was brought by lawmakers in southwest Wyoming concerned about Pacificorp’s efforts to shutter one of the generators at the Naughton Plant outside Kemmerer.

Chief sponsor Sen. Dan Dockstader (R-Afton) called it a “big picture bill” to find new opportunities for the state’s coal burning plants, and thus the mines that feed them.

“There’s got to be a solution out there” to save Wyoming’s coal plants and the jobs they provide, Dockstader told WyoFile. “We’re going to find it.”

Lawmakers from that region in particular are desperate to protect jobs and the property and ad valorem tax revenues in their region.

“I don’t know if we’re going to stop all this” coal industry decline, said Kemmerer Rep. Tom Crank (R), “but maybe we can change direction.”  

But opponents say the bill is industry protectionism subsidized by Wyoming residents who will pay more for electricity. They worry it will lower regulatory safeguards when the plants pass into the hands of speculative business ventures. Companies interested in capturing carbon to pump it into oil wells and even cryptocurrency miners have been bandied about as possible power plant buyers.

Mostly, the bill puts lawmakers’ efforts to protect the coal mines and power “uneconomic coal plants’’ on the backs and power bills of citizens, UW economist Jay Shogren wrote in a recent op-ed.  

Rocky Mountain Power has estimated it will cost between $146 million and $239 million over the next decade to keep the Naughton Plant running, according to the utility. Today, that cost is spread among all the customers of PacifiCorp’s multi-state grid.

Under Dockstader’s bill, “100 percent” of the costs “would be passed on to Wyoming families and businesses through higher bills — a hidden tax,” Shogren wrote.

The bill “will commit Wyoming families and businesses to spend hundreds of millions in higher energy prices to prop up uneconomical coal plants,” Shogren wrote.  “Perhaps Wyoming citizens will be glad to pay higher energy bills if it means coal jobs for their friends and neighbors — perhaps not. But they should have the choice and they should know the true costs of bills that take on the market.”

On the House floor, Rep. Landen Brown (R-Cheyenne) reminded his colleagues they often talk about diversifying the state’s economy. Saying he had campaigned on ending Wyoming’s “boom and bust,” he argued that the bill will take the state in the opposite direction.

“What I see here is just a continuation of that effort to stay riding on the rails of coal, oil and natural gas,” he said.

The House passed the bill on a voice vote with what appeared to be a large majority voting in favor. It must pass two more floor votes this week.

A graveyard of tax bills and a Catch-22

The legislative session started with at least 10 bills to increase or broaden existing taxes or create new ones. It also started with the leaders of both chambers endorsing proposals to broaden the sales tax and even a nod toward debating a property tax increase. The temporary Capitol building has been an abattoir for those ideas ever since.

The Senate even killed a statewide lodging tax that seemed destined for passage on Monday. House Bill 66 – Lodging tax would have raised an estimated $19 million a year in state revenue directed to the Wyoming Office of Tourism. Additional revenues would have been distributed to the counties in which they were generated.

The tax appeared an easy sell for lawmakers: It was endorsed by many in the industry it proposed to tax because the money would have paid to promote tourism. But the Senate voted 19-7 on third reading to dispatch the bill. Three senators declared a conflict and did not vote on the bill.

Broader tax reform efforts to wean the state of its energy industry dependency failed or didn’t get a vote. Speaker of the House Steve Harshman (R-Casper) maneuvered to pass a bill to broaden the sales tax while also lowering it. He ultimately dropped the idea when it became clear he couldn’t get the votes needed.

This week, the Senate Corporations Committee put the seeming final blow to any major tax reform effort when it killed House Bill 220 – National retail fairness act.

The bill was a carefully crafted income tax to hit large out-of-state corporations in the retail and hospitality sectors, like Walmart or Applebee’s. It would raise millions for schools without affecting everyday Wyoming residents, proponents said. Backed by nearly every leading lawmaker of both political parties, the bill sailed through the House on a 44-16 vote. The Department of Revenue had a hard time estimating the impact, but called its estimate of $45 million a year conservative.

The tax hit headwinds in the Senate as corporate lobbyists and Wyoming Republican Party loyalists raised a fierce outcry. Republican activists labeled it the first step in an effort to write broader income taxes.

Lobbyists said it would hurt corporate bottom lines and lead them to cut Wyoming jobs — a threat some proponents scoffed at given the scale and national pricing systems of the corporations in question.

But no matter the weight of the names on the bill and the amount of money the bill could have put into education coffers, it wasn’t enough to overcome anti-tax sentiment in the Senate.

Before Senate Corporations Committee Chairman Bill Landen (R-Casper) tabled the tax bill without a vote, he said it did not have enough support on the Senate floor. The refusal to vote has infuriated Harshman and other House leaders because their chamber put votes for a tax increase on the record and the Senate balked, according to representatives who talked to WyoFile this week.

The newly appointed chairman of the Senate Revenue Committee Sen. Cale Case (R-Lander), normally an anti-tax libertarian, said Wyoming needed to take its destiny into its own hands with the tax.

“Wyoming has often become a colony for all respects and that troubles me greatly,” Case said. Case compared the tax to the one significant tax Wyoming does collect.

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“Fifty years ago we passed an income tax,” Case said. “We called it a severance tax on corporations extracting minerals from Wyoming.”

Landen’s committee heard substantial testimony on Feb. 14, but delayed voting until Feb. 19. By then, Landen told WyoFile later, he and other Senate leaders had counted votes. His committee had the votes to move it to the chamber floor, but it faced certain death there, he said.

Some corporate lobbyists expressed a preference for a broader corporate income tax, calling it more fair than one designed to hit only certain companies. But a broader income tax would be sure to fail in the Wyoming Legislature, Landen told WyoFile.

“You start hitting your Main Street brick-and-mortar [businesses],” Landen said. “That’s the thing we are trying to avoid.”

If there is no appetite for a highly targeted tax to hit mega-corporations, Landen does not know what kind of tax will be palatable, he said. Despite his decision to keep his committee members from recording a vote on HB220, he called for courage.

“There are those in the [Republican] Party who will hit anybody and everybody” for any bill that even looks like a tax increase, Landen said. “Sometimes it takes courage to make a vote that you know some aren’t going to like.”

Juicing production

Tax breaks to juice the flagging energy industry are faring better.

The Legislature passed one tax break for the energy industry and is close to passing another. At this point, lawmakers don’t know what impact either will have on the state’s balance sheet but they’re hopeful it could juice energy production, and thus severance tax revenues.

The Legislature passed House Bill 120 – Energy production inventory Monday. It creates an exemption on ad valorem property taxes for the storage of energy production equipment before its installation. The exemption applies to anything from drilling equipment to massive wind turbines, provided they’re still in storage and waiting to be used. The equipment would have to be stored for at least a year to receive the exemption.

The Legislature’s fiscal analysts did not calculate how much tax revenue Wyoming might lose to the exemption. The amount of stored equipment that could qualify will depend on Wyoming energy markets, said Department of Revenue Director Dan Noble. One big question will be how the wind industry reacts to it.

With large wind farms on tap to be built in the state, and with energy equipment storage yards better established elsewhere, it’s unlikely turbines will be kept in storage for long, Noble said. But if companies choose to use the state to establish storage yards then Wyoming will start to lose out.

“Wind turbines are extremely expensive,” Noble said. “If they were going to be laid down and maintained in place it would be a somewhat costly exemption.”  

A severance tax break for oil and gas companies also continues to advance.

Brought by leading senators, the bill started out as a prospect that frightened many fiscal hawks — it would have exempted new oil and gas wells from paying full severance taxes for the first two years of production. The original bill would have cost the state over $100 million in tax revenue by 2022, and far more if oil prices improved but stayed below $80 a barrel, when the tax exemption would be lifted.

It was later amended to apply only to idle oil and gas wells brought back into production.

Last week, Harshman successfully convinced the House Revenue Committee to amend the bill, Senate File 134 – Severance tax-exemption to reduce the tax exemption and the number of idle wells eligible for the tax break. His amendment applies the exemption to wells shut in for 12 months, rather than the six months required by the Senate.

The Senate proposal offered a 66 percent cut in the severance tax rate. The House version of the exemption gives companies a 33 percent cut in severance taxes as long as prices remain below a certain point.

The Senate will have a chance to influence the bill again in conference committee if the House passes it.

If the rolling average of those prices stays below those points for six months, companies would only have to pay a four percent severance tax on oil and gas produced from the re-activated wells. The standard severance tax on oil and gas is six percent.

The fiscal impact isn’t known, but proponents of the bill like Senate Appropriations Committee Chairman and oil businessman Eli Bebout (R-Riverton) have argued that today the state is not collecting severance taxes on such wells because there is little incentive for companies to re-develop them.

‘Nothing of nothing is nothing,’ the proponents suggest.

On the Senate floor, Bebout declared he did not have a conflict of interest on the bill because he belongs to “a class of people” — energy industry workers — who would be affected by the Legislation. The “class” terminology allows lawmakers in Wyoming’s citizen Legislature to vote on bills that might affect their livelihood.

There are thousands of wells in Wyoming that have been idle for at least a year, according to data provided by the Wyoming Oil and Gas Conservation Commission. But it’s unclear whether companies are reworking them on their own, which could obviate the need for the incentive. A spokeswoman for the WOGCC said her group couldn’t easily answer the question.

Over six months in 2018, between 2-7 percent of 10,000 idle wells were reactivated, spokeswoman Kimberly Mazza said on Monday. The 10,000 well figure includes wells on private, state and federal lands, Mazza said.

Bebout said he didn’t know how many wells would be affected. “The wells are shut in and the recompletions are not being done,” he said. Bebout did not believe many were being done in the state, he said. “Probably not very many” in the last year or two, he said.  But Wyoming isn’t competitive with other states, he said.

“People are going to take their money and go somewhere else. People say ‘ah, no they won’t’… they will,” Bebout said.

Oil companies drilling in Wyoming take home 51.6 percent of revenues after state and federal taxes, according to a study commissioned by the Legislature last year. That split is lower than oil companies in New Mexico, Oklahoma, Texas and Utah but on par or higher than companies’ take from Montana, Colorado and North Dakota.

With no official estimate of the impact of the exemption, lawmakers are essentially flying blind on the tax break and hoping it will work, opponents argued during debate on the measure.

“We don’t know who, where and how this will impact us,” said Bebout’s counterpart, House Appropriations Committee Chairman Bob Nicholas (R-Cheyenne). “We don’t know the number of wells that will be impacted.”

Lawmakers with other interests argued they wouldn’t catch a similar break.
“When our cattle prices go down, we don’t necessarily get an exemption,” said Rep. Jamie Flitner (R-Greybull), a rancher.

UPDATE: This story has been updated with the result of votes taken on Monday and with new information provided by the Wyoming Oil and Gas Conservation Commission. — Ed.