A severance tax retreat

Editorial

By The Daily Sentinel

Monday, March 30, 2009

It seems like only yesterday that state and local elected officials of both parties were trying to determine how best to divide up the embarrassment of riches that was coming from the state’s severance tax which was projected to grow enormously over the coming decade.

That game, too, has changed.

According to financial analysts for the state Legislature, severance taxes on oil and gas production will plummet 80 percent in the fiscal year that begins July 1. Instead of the $250 million collected this year, only $40 million is predicted for next year.

A significant reduction in severance taxes was anticipated, given the dramatic decrease in gas prices nationwide. But few people expected such a precipitous decline.

And, because the severance tax is shared with local governments that are effected by energy development, it won’t be just the state budget that feels the brunt of the tax drop. Communities in Mesa, Garfield and Rio Blanco counties will see a significant drop in revenue from the tax.

Additionally, half of the revenue from severance taxes goes to the Colorado Department of Natural Resources for water conservation and wildlife programs. They, also, will be hurt by the steep drop in revenue.

Severance taxes are paid as oil and gas are produced from wells, so a reduction in the number of drill rigs operating isn’t responsible for an immediate drop in severance taxes. But as fewer wells are drilled, it means less production for the future. That, combined with the steep drop in oil and gas prices, spell long-term problems for Colorado’s severance tax revenues.

There has been considerable debate about the reasons for the drop in drilling in Colorado. We won’t reiterate those arguments here.

But the substantial drop in revenue, the communities and state programs that will be affected by it, show how important the oil and gas industry have become to Colorado.