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
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
Natural Resources Production has Always been an
Important Part of Colorado’s Economy
Colorado Oil Production (2012)
Source: Colorado Oil & Gas Conservation Commission
Colorado Oil Production (2012)
Source: Colorado Oil & Gas Conservation Commission
Colorado Gas Production (2012)
Source: Colorado Oil & Gas Conservation Commission
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.
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
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%
Severance Tax Receipts are Inherently Volatile
Colorado Per Capita Severance Tax Collections were $33.74
15th Nationally in 2012
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
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)
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
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
Severance Tax Receipts are Inherently Volatile
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.
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
Severance Tax Receipts are Inherently Volatile
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%
Severance Tax Receipts are Inherently Volatile
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
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
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
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
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
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
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
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
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
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
Severance Tax Receipts are Inherently Volatile
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
Severance Tax Receipts are Inherently Volatile
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
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