The severance tax conundrum

Colorado statutes are clear.  Severance tax collected by the state gets divided in two parts – after the Governor’s Energy Office (GEO) takes a chunk off the top. Half goes to the Department of Natural Resources (DNR) to be split equally between the department’s operational account and perpetual base account. The other half of severance tax revenue – the “local severance tax” – flows to the Department of Local Affairs (DOLA).

Within DOLA, 70% of the tax revenue goes to the Energy Impact Assistance Fund (grant fund) and the remaining 30% is directly distributed back to energy-impacted communities based on detailed impact metrics related to employee population, drilling/mining permits, and actual production.  The local severance tax is the only severance tax revenue that is used to mitigate the impacts of natural resource extraction. This is important when considering how the local revenue has been spent in the last decade.

NATURAL GAS LEAK IN WINDSOR, COLORADO

Following the 2007 legislative session, an interim process was established to visit the manner in which the severance tax and federal mineral lease (FML) revenues were distributed. The Colorado Municipal League and Colorado Counties, Inc. worked side by side to ensure that the local distributions were not reduced but that they were distributed to more accurately address impacts.  The result was legislation, supported by CML and CCI, which made changes to severance tax and FML distributions.

The ink was not even dry on the legislation before the recession, which had already been impacting state and local budgets, led the state to begin depleting cash funds to balance the state budget. From 2008-2012 and 2015, around $300 million of local severance tax revenue was swept to backfill the state’s budget – and the sweep in 2015 was actually in a year of dynamic state revenue growth and not a recession. Nearly 100% of the sweeps were from the grant fund, which meant that critical infrastructure related to energy impacts went largely unbuilt, and most of it in economically disadvantaged parts of the state where extraction activity had dropped dramatically.

Considering that municipalities and other local governments match grant dollars as much as 4 to 1, the loss of positive economic impact to mostly rural Colorado was over $1 billon. Jobs went unfilled, materials from local companies went unordered. While commitments have been made to attempt to restore other sources of funds that backfilled the state budget, there has not yet been one penny of local severance tax money repaid to the grant fund.

The question is how can local governments ensure that local severance revenues get to impacted local governments without being subject to fiscal pressures on the state’s Joint Budget Committee (JBC)?

Recent events freeze critical infrastructure projects

At the end of the 2016 session, a surprise decision by the Colorado Supreme Court left the legislature and the Department of Revenue (DOR) scrambling to figure out how to pay potential severance tax refunds to oil and gas companies as a result of the court’s decision.  The decision stated DOR was not interpreting a statute on severance tax deductions properly, which allows for companies to file amended returns to recapture the deduction. Initial fiscal impacts were as high as $400 million, but by the time emergency legislation (SB 16-218) was announced to pay for potential refunds, that amount was down to $115 million.

That same legislation also froze unencumbered funds for local energy impacts and programs in the Department of Natural Resources (DNR). The intent of freezing the funds was to make them available to repay the state’s general fund, and only majority vote of the JBC can unfreeze all or part of the funds. The immediate impact was to place in doubt at least $20 million of critical infrastructure projects awaiting prioritization for DOLA’s August grant cycle.

CML was highly critical of the JBC for not releasing some of the funds when the committee met in June, as industry representatives and others were already saying that the amount of refunds estimated by SB 218 was higher than that which was likely to be claimed. While the JBC certainly has the right and the responsibility to ensure the budget remains balanced, energy impacted communities are once again unsure whether or not revenue intended to directly mitigate the impacts (past and present) of extraction activity will instead be used to plug a hole in the state budget.

One more chance for 2016 grant requests

The JBC will meet once again on August 1 to consider new information from DOR and industry representatives, as well as get the perspective of the Governor’s budgeting office on anticipated refunds and fiscal impacts. Discussions with JBC members led CML to believe that there may be a chance to authorized DOLA to continue with the August grant cycle, and the League would be greatly appreciative of such a decision by the JBC.

However, whether or not all of local governments’ $48 million currently frozen will ever make it to its statutorily designated recipients is not yet know.  Also not known is whether or not the JBC will consider repaying the general fund with other sources, such as the state unclaimed property trust fund.

CML will continue to be strong advocates for municipalities to get back their share of energy impact funds, including the $300 million that was captured to keep the state budget afloat in previous years.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s