Dueling claims over proposed severance tax change

WELD COUNTY – Colorado’s oil and gas industry is bracing itself for a ballot initiative that could end a 30-year-old tax credit and create a fund to help shore up financing for the state’s ailing higher education system.

The proposed change to the state’s severance tax structure has the industry swinging back at initiative supporters and some local governments fretting that they will lose the local severance tax revenue they’ve come to depend upon.

“The main reason we’re against it is it’s a significant tax increase that will have a devastating impact on Colorado’s economy and on the consumer,´ said Dan Hopkins, spokesman for Coloradans for a Stable Economy, which opposes what’s currently called Initiative 113.

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“The tax increase is going to result in higher costs at the pump and higher home heating costs,” he said.

And fears that halving the portion of severance tax going to local governments and school districts have some up in arms.

“The information we were given showed the 50 percent of severance tax counties and cities now receive would be reduced to 22 percent, or by more than half,´ said Rob Masden, pro-tem chairman of the Weld County Board of Commissioners, which unanimously passed a resolution opposing the initiative on July 14.

“To mess with that (revenue), it doesn’t take much to put some government entities over the edge financially,” he said.

Weld County, with the most active oil and gas wells in the state, gets about 40 percent of its budget through industry severance tax revenue.

Ballot deadline approaches

Supporters of Initiative 113 have been gathering signatures for months to meet an Aug. 4 deadline to put the measure on the November ballot. George Merritt, a spokesman for A Smarter Colorado, said he believes there will be “no problem” in obtaining the 76,000 valid voter signatures needed.

Merritt said the oil and gas industry has been spreading fear among local governments and Colorado voters in general through misleading claims about the initiative.

“It is not a tax increase, it’s the elimination of a tax credit – period,” he said. “It doesn’t affect Colorado taxpayers at all.”

One thing that both sides agree upon is that the proposed change would have an impact on the oil and gas industry, which has been booming over the last eight years as the number of permits approved by the state went from just over 1,000 in 1999 to nearly 6,400 last year.

Since 1977, the oil and gas industry has been able to take an 87.5 percent property tax credit to offset Colorado severance tax. Over the last three decades, that’s resulted in many companies often not paying any severance tax – or getting a refund. A study by the Tucson. Ariz.-based Sonoran Institute said that a review of state tax returns filed by oil and gas companies in 2004 indicated that 81 percent of those returns resulted in refunds.

Eliminating the tax credit would raise an estimated $237 million to $321 million annually, according to the state’s budget office. A Smarter Colorado is estimating $261 million in its presentation to voters.

Initiative supporters say it’s time to end the subsidy, which they say was generously offered to an incipient industry to help it grow during the energy-strapped mid-1970s. Opponents remember it differently, saying the severance tax structure was set up to mostly help local governments impacted by drilling and that the oil and gas industry “was well established in Colorado by then,” according to Hopkins.

Showdown looming

Either way, a showdown is looming over whether the tax credit should be eliminated and the money used to fund higher education, preserve wildlife habitat, fund renewable energy and energy efficiency programs, and provide money for transportation and water projects in communities impacted by oil and gas operations.

One big issue is how much money would still go to local governments and tax-receiving entities if the measure is approved by voters in November.

Merritt said there has been confusion on that point, with opponents misleading governments about a loss of funding. He said the initiative would reduce the current percentage of severance tax received by local governments from 50 percent to 22 percent, but it would be 22 percent of a much larger pie.

“They’re getting 22 percent of a pot that adds another $261 million to it,” he said. “The point is, the way this is set up the same distribution exists and all of the (existing) programs are fully funded and we’ve added additional revenue.”

A Smarter Colorado claims that, under a revised severance tax structure, local governments would be dividing $98.3 million annually instead of the $93 million now being distributed.

Critics of the measure also say it’s the wrong way to provide funding to a financially strapped higher education system. Under the proposal, 60 percent of the severance tax would be used to fund Colorado Promise Scholarships, a program to help qualified students from low and middle-income families pay for college.

“It’s a poorly conceived initiative that will not solve the funding problem at CSU or any other college,´ said Hopkins. “It does nothing to address (colleges’) real concern, which is operating costs.”

But Albert Yates, former president of Colorado State University and now a co-chair for A Smarter Colorado, said the measure does address a serious issue in Colorado: making education accessible to lower-income students.

“Most people focus on funding but the two issues are really funding and access,” he said. “It’s especially the middle-income students who are closed out of higher education.”

Yates said current CSU President Larry Penley is supporting the measure, as well as University of Northern Colorado President Kay Norton. Yates said it’s time to let the oil and gas industry stand on its own.

“Now that the industry has grown up and is on its feet, it’s time to ask the question how can we better spend this money,” Yates said. “What better investment can we make than in the people of this state?”

The measure also carries the strong endorsement of the Colorado Commission on Higher Education, which voted unanimously in favor on July 10, noting that the revised severance tax would still be lower than all neighboring states except Utah.

Hopkins said that argument should not be used in the ongoing debate. “I don’t think it’s ever a good idea to base your tax policy on what other states are doing,” he said. “You really need to look at the total tax structure.”

Industry’s death knell?

Some critics say the measure will drive oil and gas companies to states that with lower tax rates.

Masden said he worries that Weld County’s 7,000 oil and gas industry jobs – and their revenue – could be in jeopardy if the measure passes.

“They’re looking at other places,” he said. “They’re not going to withdraw from Colorado, but they’re looking at other places. You try to work with them, and we don’t want to see them beat up this badly.”

Cathy Shull, executive director of Progressive 15 – a loose confederation of 15 northeast Colorado counties including Weld and Larimer – said her membership has not yet taken a formal position on the measure but will likely do so at its fall meeting in mid-September.

Shull said some members are concerned about losing the oil and gas industry. “There is that concern anytime you start changing how a major part of your economy is taxed,” she said. “I would say right now they’re leaning in opposition.”

Materials produced by opponents of the measure say they won’t simply absorb any new tax and promise to pass them on to consumers.

“Shareholders aren’t going to sit back and allow the companies they hold stock in to absorb tax increases,” says one answer to a frequently asked question about Initiative 113. “Like it or not, businesses pass along tax increases to the consumers, so the tax increase in Initiative 113 will be felt sooner or later by all of us, in the form of higher fuel costs and higher heating costs.”

But the Sonoran Institute study concluded that eliminating the severance tax break in Colorado will not cause gasoline prices to rise, because the state’s contribution is so small compared to the total gasoline supply. It would not likely raise the cost of natural gas, either.

“The factors that drive gas and home heating prices are not local,´ said Joe Marlow, the study’s author and senior economist at the Sonoran Institute. “Contrary to industry claims, if Colorado voters decide to end the tax break for the oil and gas industry it would not raise prices locally or anywhere else.”

The oil and gas industry is predicted to spend between $15 million and $20 million to defeat the measure, as it did in California in 2006 when a measure to add a tax on the industry to fund the development of alternative fuels and vehicles was voted down.

But A Smarter Colorado wants to make sure there is a different outcome in Colorado in 2008.

“I think Coloradans have a very stark choice,” Merritt said. “Taxpayers can give a $300 million tax credit to oil and gas or make an investment in our state.”