CHAPTER 14 POLITICS AND ECONOMICS OF STATE MINERAL TAXATION: A LOOK AT THE FUTURE

• Jurisdiction: United States

Mineral Taxation
(Mar-Apr 1977)
CHAPTER 14
POLITICS AND ECONOMICS OF STATE MINERAL TAXATION: A LOOK AT THE FUTURE
Kenyon Griffin and Robert Shelton
University of Wyoming
Laramie, Wyoming

INTRODUCTION

The energy crisis following the OPEC oil embargo in 1974 produced an unexpected effect for energy exporting states. While all state and local governments experienced escalating costs directly or indirectly attributable to increased energy costs, energy rich states are the recipients of increased revenue generated by energy taxes. Each price increase in oil and gas has produced a comparable increase in tax revenue since energy severance taxes are tied to the selling prices. Price increases for oil and gas have had another important effect; coal has become a more attractive energy resource, a fact reflected in increasing demand nationwide. Thus, the nation's energy crisis has created a new policy setting for energy taxation policies of state governments.

The future course of energy taxation by states will be determined not only by increasing demands nationally, but by the political and economic climate in the individual states. This paper will analyze energy resource taxation incorporating both economic and political perspectives. The purpose is to explain how these factors coalesce at the state level and the implications of this for mineral taxation in the immediate future.

The primary focus of the paper is on coal severance taxes in the Rocky Mountain region. The first section reviews taxation objectives which states could consider in developing an energy tax policy. The second section discusses findings from a national survey of state severance tax policies on oil and gas, coal, uranium and oil shale. This discussion includes information on changes in energy severance taxes, distribution of revenue and a review of the contributions made by energy taxes in 10 select states. The third section describes the current coal situation in the Rocky Mountain region regarding production, distribution and taxation. The final section examines tax preferences of Wyoming residents, reviews the proposed Constitutional amendment in Colorado and considers possible effects of federal impact assistance for state governments in the West.

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STATE TAX OBJECTIVES FOR ENERGY RESOURCES

There are a number of political taxation objectives which have been hypothesized in the public finance literature.¹ Briefly, these may be summarized as follows.

A) Maximize Intrastate Consumption.

This is, essentially, a regional development objective, whereby the state attempts to encourage the use of the natural resource within the boundaries of the state. Of course, given the various environmental constraints and the particular uses of coal, this would be a questionable state taxation objective.

B) Maximize Total Revenue.

The state would attempt to maximize the total private and public return from the natural resource. It has been argued that this objective can be viewed as a proxy for economic activity within the state.² However, given the capital intensiveness of the coal mining industry, pursuing this objective might have some negative political repercussions since the return to the owners of capital likely will be paid to out-of-state residents.

C) Maximize Tax Revenue.

In pursuing this objective, the state would attempt to meet its budgeted expenditure requirements by taxing all of the various sources of revenues possible, including natural resources. Under this objective, a natural resource such as coal would not be singled out for taxation because of any special characteristic — other than its general ability to generate revenue.

D) Maximize Tax Exportation.

The state, under this objective, would attempt to minimize the tax payments of the residents of the state in question by exporting the tax base to residents of other states. The state would single out those sources of revenue which had the largest exportable base for initial taxation.

E) Correct For "External Effects."

The state, under this objective, might attempt to tax the natural resource so as to correct for the external effects created by the development and/or processing of the natural resource. The external effects might take the form of damage to the natural environment or social impacts.

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Objectives (C) and (D) appear the most viable in terms of a long-run basis for the taxation of coal and we shall concentrate on examining the implications of their adoption in the following sections of this paper.

TAXES AND ENERGY RESOURCES IN THE UNITED STATES

A study to examine the role of severance and severance-type taxes on energy resources and the contribution of revenue generated from such taxes was undertaken in 1976.³ Data from this nationwide survey, prepared by state correspondents, provided information on the political and economic aspects of state mineral taxation. The following discussion focuses on three questions: (1) Which states levy severance and severance-type taxes on energy resources? (2) How is revenue from such taxes utilized by the various states? (3) What contribution do severance taxes on the various energy resources make to state government?

Severance Taxes on Energy Resources

The study focused on severance and severance-type taxes levied on four energy resources: oil and gas, coal, uranium and oil shale. In the questionnaire, severance taxes were defined to include severance, mining, natural resources, tonnage, conservation and production taxes. Severance-type taxes were defined as those which possess the characteristics of a severance tax, such as taxes based on gross sales and receipts. The state correspondents were asked to indicate whether such taxes were levied on energy resources in 1972 and 1976.

These findings are summarized in Table 1. Oil and gas were the most widely taxed of the four resources both in 1972 and 1976. Of the reporting states, 21 levied a severance tax in 1972 while 22 states utilized this tax source in 1976. The additional state was South Dakota, which enacted a privilege tax in 1976 based on net income derived from mineral production. A severance or severance-type tax on coal was levied by nine states in 1972 but by 1976 the number had increased to 12. Tennessee and North Dakota enacted coal severance taxes and South Dakota's privilege tax will also affect any coal production in that state.

Uranium was subject to a severance tax in 1972 in only four states—Idaho, Montana, New Mexico and Wyoming; no additional states levied such taxes between 1972 and 1976. No states have enacted a severance tax on oil shale. However, several states do have general severance tax laws which would affect oil shale production.

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TABLE 1: Severance and Severance-type Taxes by State on Various Energy Resources

COAL	GAS and OIL	Legislative Action on Severance Taxes
1972	1976	1972	1976	1975	1976
ALABAMA	*; —————	*; —————	*; —————	*; —————	PROPOSED; —————	PROPOSED; —————
ARIZONA	No Reply; —————	—————	—————	—————	—————	—————
ARKANSAS	*; —————	*; —————	*; —————	*; —————	—————	—————
CALIFORNIA	—————	—————	—————	—————	—————	—————
COLORADO	*; —————	*; —————	*; —————	*; —————	PROPOSED; —————	PROPOSED; —————
CONNECTICUT	—————	—————	—————	—————	—————	—————
DELAWARE	—————	—————	—————	—————	—————	—————
FLORIDA	—————	—————	*; —————	*; —————	—————	—————
GEORGIA	—————	—————	—————	—————	—————	—————
IDAHO	—————	—————	—————	—————	—————	—————
ILLINOIS	—————	—————	—————	—————	—————	—————
INDIANA	—————	—————	*; —————	*; —————	—————	—————
IOWA	—————	—————	—————	—————	PROPOSED; —————	—————
KANSAS	—————	—————	*; —————	*; —————	—————	—————
KENTUCKY	*; —————	*; —————	*; —————	*; —————	—————	PASSED; —————
LOUISIANA	—————	—————	*; —————	*; —————	—————	—————
MAINE	—————	—————	—————	—————	—————	—————
MARYLAND	—————	—————	—————	—————	—————	—————
MASSACHUSETTS	—————	—————	—————	—————	—————	—————
MICHIGAN	—————	—————	*; —————	*; —————	PROPOSED; —————	PROPOSED; —————
MINNESOTA	—————	—————	—————	—————	—————	—————
MISSISSIPPI	—————	—————	*; —————	*; —————	PROPOSED; —————	PROPOSED; —————
MISSOURI	—————	—————	—————	—————	PROPOSED; —————	PROPOSED; —————
MONTANA	*; —————	*; —————	*; —————	*; —————	PROPOSED; —————	—————
NEBRASKA	—————	—————	*; —————	*; —————	—————	—————
NEVADA	—————	—————	—————	—————	—————	—————
NEW HAMPSHIRE	—————	—————	—————	—————	—————	—————
NEW JERSEY	—————	—————	—————	—————	—————	—————
NEW MEXICO	*; —————	*; —————	*; —————	*; —————	PROPOSED; —————	PASSED; —————
NEW YORK	—————	—————	—————	—————	—————	—————
NORTH CAROLINA	—————	—————	—————	—————	—————	—————
NORTH DAKOTA	—————	*; —————	*; —————	*; —————	PASSED; —————	—————
OHIO	*; —————	*; —————	*; —————	*; —————	—————	—————
OKLAHOMA	—————	—————	*; —————	*; —————	—————	PASSED; —————
OREGON	—————	—————	—————	—————	—————	—————
PENNSYLVANIA	—————	—————	—————	—————	—————	—————
RHODE ISLAND	—————	—————	—————	—————	—————	—————
SOUTH CAROLINA	—————	—————	—————	—————	—————	—————
SOUTH DAKOTA	—————	—————	—————	*; —————	—————	PASSED; —————
TENNESSEE	—————	*; —————	*; —————	*; —————	PASSED; —————	—————
TEXAS	—————	—————	*; —————	*; —————	PASSED; —————	PASSED; —————
UTAH	—————	—————	*; —————	*; —————	PROPOSED; —————	—————
VERMONT	—————	—————

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