Saturday, May 17, 2014

Counties miss out on benefit of severance tax

EDITOR'S NOTE: A final project for Spring 2014.

By Michael Marcks

Recent surges in oil and gas production throughout Texas have been a boom for drilling companies, small businesses, and local economies. And, the state of Texas has stuffed accounts full of taxes on petroleum.

But the taxes on oil and natural gas, also called severance taxes, bypass local governments and go straight to two state accounts: the Rainy Day Fund and a fund for public education.

Severance taxes have generated billions of dollars for state coffers over the past five years because of increased oil and gas production around the state.

One of the most prolific oil and gas producing regions is called the Eagle Ford Shale, a 200-mile strip of South Texas that runs from the Mexican border to just north of Bastrop. Local leaders say that this arrangement is unfair.

Data from the Texas Comptroller of Public Accounts shows that oil and gas taxes from Eagle Ford Shale counties has generated over $3 billion in revenue between 2008 and 2013.
Three-quarters of the taxes on oil go to the state’s Rainy Day Fund, while the remaining quarter goes to a public education fund. All taxes on natural gas go to the Rainy Day Fund.

“The rainy day fund is pretty flush these days. And the bulk of that money comes from severance taxes from oil and gas revenues,” said Dr. Tom Tunstall, an economics professor at the University of Texas -- San Antonio.

State legislators feel that the severance taxes are a windfall for the state, and are using the money to fund other state needs. But all that revenue for the state has come at great cost to the communities where the drilling occurs. Communities in the Eagle Ford have been burdened with overpopulation, congestion on previously deserted roadways, and intense damage to county roads.

This has led local leaders to say that the severance tax arrangement is unfair. DeWitt County Judge Daryl Fowler says that state decision makers should use a portion of the severance tax to help pay for the damage that oil and gas development incurs. But that would also mean fewer profits for state accounts.

 “There would be no windfall if they would just recognize the damages, and somebody else is paying for it,” Fowler said. “And it really is ... more like a free lunch at someone else’ expense.”

Click to see visualization
Most states assess some kind of severance tax on their natural resources, but no two do it in exactly the same way.

All tax revenues from coal mining in West Virginia are distributed back to county governments. Coal-producing counties receive 75 percent of the funds, while non-coal producers receive 25 percent.

Colorado, which is currently undergoing an oil and gas boom of its own, splits severance taxes 50-50 between its general fund and counties that are affected by oil and gas production.

City and county governments in North Dakota receive a portion of severance taxes but local officials say that they don’t receive nearly enough. The state of North Dakota keeps over 90 percent of the severance taxes from certain counties.

Texas was the first state to collect a severance tax. The practice started in 1905 after the Spindletop oil well started to produce then-historic levels of oil. The severance tax code has undergone minor changes since then, but the main concept has remained the same.

But that could change in 2015 when the state legislature meets again. Local officials in the Eagle Ford have spent the past two years building a platform of severance tax reform to present. The Eagle Ford Consortium (EFC), a roundtable of oil and gas industry members and local government leaders, has hired a lobbyist to help pass bills that would deliver a percentage of severance taxes to local governments.

“Where the damage is being done … we’d like to see some of that money come back,” said EFC president Leodoro Martinez.

Fowler and others plan to propose a mechanism that sets aside a portion of the severance tax for counties that are affected by oil and gas development. But with money rolling into state accounts at a record rate, it’s unclear whether or not that is likely to happen.

“We’ve just got to come to some sort of an agreement that leaves us in a better position than we were before,” Fowler said. “It’s a once in a generation opportunity that comes along. The state’s taking advantage of it but we can’t.”


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