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SEVERANCE TAX & FEDERAL MINERAL
LEASE REVENUES IN COLORADO:
STATE AND LOCAL DISTRIBUTIONS
State Demography Office
Colorado Department of Local Affairs
www.colorado.gov/demography
May 2014
Grant Nülle, Economist
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State Demography Office’s
Core Competencies• Population
• Year-by-year Estimates
• Projections (out to 2040)
• Characteristics – age, household formation, ethnicity, etc.
• Economy – State, Planning Regions, Counties
• Employment estimates on an annual basis
• Job Forecasts (out to 2040)
• Base Industry analysis – Economic Drivers, Direct, Indirect, & Induced jobs
• Geographic Information Systems (GIS) mapping & analysis
• Census state data center
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Natural Resources Production has Always been an
Important Part of Colorado’s Economy
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Colorado Oil Production (2012)
Source: Colorado Oil & Gas Conservation Commission
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Colorado Oil Production (2012)
Source: Colorado Oil & Gas Conservation Commission
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Colorado Gas Production (2012)
Source: Colorado Oil & Gas Conservation Commission
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Importance of Non-renewable Resource Taxation
• Non-renewable Resource Extraction generates “Rents” that can be
captured by Factors of Production and Governments
• Rents are defined in economics as a return to a factor of production that
does not affect her/his behavior.
• Provided Resource prices exceed producers’ operating costs, revenues
generated above the cost threshold (rents) could be taxed away without
affecting producer behavior – at least in the short run
• Attractive to tax; unlike capital, non-renewable
resources are immobile
• Severance Tax and FML are principal means by
which resources are taxed in the U.S.
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Severance Tax• Taxes applied to non-renewable resources severed from the ground-
tax the extraction or production of oil, gas, and other natural resources
• 32 states currently produce oil and natural gas
• 29 States Impose a Severance Tax
• 3 States (NY, PA, MD) Impose an Impact Fee in lieu of Taxes
• 3 States (NC, ID, WI) – levy a severance tax on oil and gas production despite
lacking commercially viable oil and gas wells
• Taxation Methodology Differs by State
• Many States tax the volume of oil or gas produced
• Others (TX and WY) tax the value of produced oil and gas
• Two states - Colorado and Illinois - tax the gross income
from produced oil and gas
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Severance Taxes & State Revenues• In many Energy-Intensive States, Severance Taxes comprise a large
share of State Revenues
• In 2013 3 States Derived 40% of Tax Revenues from Severance
• Alaska (78%), North Dakota (46%), and Wyoming (40%)
• Another 9 States Derived 6-14% of Revenues from Severance
• U.S. Average is 1.9%
• Colorado 1.3% in 2013; Peaked at 3.2% in 2009State Severance Proportion
AK 78.3%
ND 46.4%
WY 39.7%
NM 13.7%
WV 11.3%
MT 10.7%
LA 9.0%
TX 9.0%
OK 5.8%
NV 4.1%
KY 2.5%
UT 1.8%
MS 1.4%
CO 1.3%
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Severance Tax Receipts are Inherently Volatile
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Colorado Per Capita Severance Tax Collections were $33.74
15th Nationally in 2012
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How it Works – The Severance Formula
State Oil and Gas Severance Tax Revenue =
Production Quantity - Small Well Exemptions Quantity – Govt
Owned production
* Oil or Gas Price
- Processing and Manufacturing (TPM) costs
* Tax Rate
- Property Tax Credit
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How it Works – The Severance Formula
“Nerd Version”
SevRevFY t+1 =
O&GQuantityCYt *(1– SmallWellProdcution% CYt )
*(1– GovtOwnedProdcution% CYt )
* O&GPrice CYt *(1 – TPM%CYt) *SevRate
- 87.5% * Mill CYt+1* Assessment Ratio * ((O&GQuantity
CYt-1 *(1 –SmallWellProduciton % CYt-1)
* O&GPrice CYt-1)*(1 –TPM% CYt-1)
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Key Aspects of Severance Tax
• Production from Low-Producing Wells exempt from taxation
• The exemption was increased significantly in 2000
• Currently 15 barrels a day for oil and 90 MCF a day for gas, with these averages calculated on an annual basis
• As much as 60%* of Active Wells exempt from taxation
• Oil and gas are taxed on a sliding scale based on gross income of any individual or entity receiving income from oil or gas produced in Colorado• 2% for gross income under $25,000
• 3% for $25,000 to $100,000
• 4% for $100,000 to $300,000
• 5% for gross income over $300,000
• At an average price of $75 per barrel for oil and $5 per MCF for gas, it only takes annual production of 4,500 barrels of oil and 60,000 MCF to reach the 5% tax class.
• In Practice, Applied Severance Rate is 5%
* Author’s Calculations Based on Colorado Oil & Gas Conservation Commission 2012 Production Summary
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The Property Tax Credit
• Taxpayers are allowed to deduct up to 87.5% of Property Taxes Paid on
Assessed Value of Oil and Gas Produced
• The mill levy on oil and gas production is a sum of a number of mill levies imposed
by various taxing districts
• Assuming Applied Severance Tax Rate is 5%, the “Magic Mill Number” by
which a particular well would be exempt is 57.1 Mills
• Determining how much severance tax liability is created / not created
depends critically on the applicable mill levies at each well
• A well-by-well analysis, that incorporates every single overlapping mill levy, would be
needed to begin to estimate how many wells by jurisdiction produce severance tax
liability
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Severance Tax Receipts are Inherently Volatile
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Federal Mineral Lease
• Royalties, rents, bonuses derived from non-renewable resource
production occurring on federal lands and offshore blocks
• Revenue Distributions Differ According to Onshore/Offshore Status
• Onshore revenues shared 51% / 49% between Federal Government & States,
except Alaska which keeps 90%
• States keep 27% of Offshore revenues, $150M is deposited in the Historic
Preservation Fund annually, and the remainder goes to U.S. Treasury accounts
• Since 1982 Office of Natural Resources Revenue has collected and distributed
$264 billion; $14.2 billion collected and distributed in 2013.
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Federal Mineral Lease Revenues • Onshore Royalty Rate is generally 12.5%
• There are exceptions e.g., sliding scale on older leases, reduced royalty rates on
certain oil leases with declining production, reinstated leases, etc.
• Rents are Derived from Competitive & Non-Competitive Leases of land
• Public lands available for oil and gas leasing be offered first by competitive leasing
via Bureau of Land Management
• Non-competitive leases occur only after no bids received at oral auction for 2 years
• Leases last 10 years and may continue provided thereafter provided a well is on the
lease capable of producing in paying quantities on it
• Non-competitive land rents are $1.50/acre each year for first 5 years &
$2/acre thereafter.
• Competitive bids must be $2.00/acre or more per year. These are the
“Bonus” Rents
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Severance Tax Receipts are Inherently Volatile
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Federal Mineral Lease - State Shares
• 37 states currently receive Onshore & Offshore FML
• 5 States Receive 90% or more of revenues
• Colorado Accounts for:
• 10.5% of the 47,427 total leases in effect
• 10.3% of 36.1 million producing acres
• 9.3% of the 23,507 producing leases
• 7.3% of 93,598 producing wells
• 11.7% of 12.6 million producing acres
3.9 million acres of federal land are under lease
in Colorado - That is approximately 1 out of every 6 acres of federal land
and 1 out of every 20 acres in Colorado
State 2013 FML $ Share
Wyoming 46.6%
New Mexico 23.9%
Utah 6.9%
Colorado 6.5%
California 5.0%
North Dakota 4.5%
Montana 1.8%
Louisiana 1.4%
Alaska 0.9%
Texas 0.8%
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Severance Tax Receipts are Inherently Volatile
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Severance Tax Receipts are Inherently Volatile
$(50,000,000)
$-
$50,000,000
$100,000,000
$150,000,000
$200,000,000
$250,000,000
$300,000,000
$350,000,000
$400,000,000
$450,000,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total Colorado FML Revenues by Revenue Source
Royalties Rents Bonus Other Revenues
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Severance Tax Receipts are Inherently Volatile
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Colorado Total FML Revenuesby Product Type
Coal Natural Gas & Oil CO2 Other Products
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Severance & FML Distributions
Per Colorado Statutes, Severance and FML are distributed to a number
of State and Local Government entities for a variety of purposes
The Department of Local Affairs (DOLA) administers the Direct
Distribution of State Severance Tax and FML revenue to counties,
municipalities, and school districts. This is accomplished through:
• Direct Distribution - counties, municipalities, and school districts
• In August 2013, over $47 million in annual Severance Tax and
Federal Mineral Lease funds were directly distributed to 502
Colorado counties, municipalities, and school districts
• Local Government Project Grants & Loans
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Total State Severance Tax Revenue
50%
Operational Account
50%
Perpetual Fund
50%
Local Impact Fund
Department of Local Affairs
70%
Local Government Grant Projects
30%
Direct Distribution
50%
State Trust Fund
Department of Natural Resources
Colorado Energy Office*
*Annual $1.5 million from total gross receipts to Innovative Energy Fund through July 2016.
Source: DOLA, Energy and Mineral Impact Advisory Committee
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Oil Shale
Oil Shale Trust Fund
Non-BonusIncludes Rents and
Royalties
(Non-Oil Shale)
48.3%
State Public School Fund
FY13 Cap: $70.3M
10%
Colorado Water Conservation
Board
FY13 Cap: $16.4M
1.7%
School District
Direct Distribution
(Dept. of Local Affairs)
FY13 Cap: $3.9M
40%
Local Impact Program
(Dept. of Local Affairs)
Bonus(Non-Oil Shale)
50%
Higher Education Maintenance and
Reserve Fund
50%
Local Government Permanent Fund
Federal Mineral Lease Receipts
in Colorado49% to Colorado
51% to Federal Government
Higher Education
Federal Mineral
Lease Revenue
Fund
Cap: $50M
Spillover
Spillover
50% Direct Distribution to
Counties and Towns
50% Grants to Local
Governments
Source: DOLA, Energy and Mineral Impact Advisory Committee
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How the Severance Tax Distribution Works
County Pool Allocation
Based on the statewide share of the following factors:
•Colorado Employee Residence Reports (CERR)
•Mining and Well Permits
•Mineral Production
Direct Distribution Grants and Loans
Subcounty Distribution:
Distribution of the county pool to county/municipalities based
on countywide share of the following factors:
•Colorado Employee Residence Reports (CERR)
•Population
•Road Miles
Energy and Mineral Impact Advisory Committee
Source: DOLA, Energy and Mineral Impact Advisory Committee
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Severance TaxCounty Pool
Factor *Recommended Weight
August 2013 Weight for 2012 Weight for 2011
Colorado Employee Residence Reports 40% 40% 40%
Mining and Mineral Permits 30% 30% 30%
Mineral Production 30% 30% 30%
* Each factor must be 30%, with remaining 10% at discretion of Executive Director.
Subcounty Pool
Factor Recommended Weight
August 2013 Weight for 2012 Weight for 2011
Population 34% 34% 34%
Colorado Employee Residence
Reports 33% 33% 33%
Road Miles 33% 33% 33%
Source: DOLA, Energy and Mineral Impact Advisory Committee
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How the Federal Mineral Lease Distribution Works
County and Municipal
County Pool Allocation
Based on the statewide share of the following factors:
•Colorado Employee Residence Reports (CERR)
•Federal Mineral Lease Generated
Subcounty Distribution:
Distribution of the county pool to county/municipalities based
on countywide share of the following factors:
•Colorado Employee Residence Reports (CERR)
•Population
•Road Miles
Direct Distribution Grants and Loans
Source: DOLA, Energy and Mineral Impact Advisory Committee
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Federal Mineral Lease RevenueCounty Pool
Factor
Recommended Weight
August 2013 Weight for 2012 Weight for 2011
Colorado Employee Residence Reports* 35% 35% 35%
FML Revenue Generated 65% 65% 65%
*35% maximum (C.R.S.34-63-102(5.4)(c))
Subcounty Pool
Factor
Recommended Weight
August 2013 Weight for 2012 Weight for 2011
Population 34% 34% 34%
Colorado Employee Residence Reports 33% 33% 33%
Road Miles 33% 33% 33%
Source: DOLA, Energy and Mineral Impact Advisory Committee
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How the Federal Mineral Lease Distribution Works
School District
County Pool Allocation
Based on the statewide share of the following factors:
•Colorado Employee Residence Reports (CERR)
•Federal Mineral Lease Generated
Subcounty Distribution:
Distribution of the county pool to school districts based on
countywide share of:
•Pupil Count
Direct Distribution
31
Source: DOLA, Energy and Mineral Impact Advisory Committee
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Severance Tax Receipts are Inherently Volatile
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Competitive Grants and Loans
• Established in 1977, Energy and Mineral Impact Assistance Program assists
political subdivisions that are socially and/or economically impacted by the
development by non-renewable resource extraction
• Reinstated in FY 2013 after diversion of revenues to fund state budget deficits
in FY 2009-12
• Eligible entities to receive grants and loans include municipalities, counties,
school districts, special districts and other political subdivisions and state
agencies.
• Projects include -- water and sewer improvements, roads, recreation
centers, senior centers, local government planning, etc.
• Loans are available to assist communities with critical water and wastewater
improvements
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Severance Tax Receipts are Inherently Volatile
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Summary• Colorado is blessed with abundant non-renewable resources
• In addition to Property Tax, Severance and FML are important
revenue sources to the state and local governments
• Budgeting for the impacts of mineral and energy development
is imperative and challenging
• DOLA is a critical partner in distributing Severance and FML
Ask us for Help!
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Do you have Questions
for my Answers???
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Public Finance Timing Issue
Source: BBC Research & Consulting