The promise and peril of energy tax revenues

Of the $763 billion in tax revenues that states collected in 2011, only $14.6 billion – less than 2 percent – came from severance taxes on coal, gas and oil. Energy production is very concentrated in the United States: Just nine states receive over 5 percent of their tax revenues from energy producers. Currently, the bulk of severance revenues comes from oil production. Alaska, a state floating on an ocean of oil, gets 76 percent of its revenues from a handful of big oil companies that have drilling rights on the North Slope of the state.

Although there has always been natural gas production in America, hydraulic fracking has given rise to substantial drilling activity in several Northeastern states along the Marcellus and Utica shale formations. Pennsylvania, West Virginia and Ohio have substantial reservoirs of natural gas, but the impact this boom will have on state finances is not yet known. These new supplies have come to market when demand is down and have swamped the nation’s usage and storage capacity, driving gas prices down to record lows. States that rely on, or plan for, revenues from energy severance taxes will face a lot of volatility from demand and price changes. Natalie Cohen, head of municipal research at Wells Fargo, sketched it out in a recent report:

Wyoming, for example, collects severance tax based on the taxable value of current-year production. With the drop in natural gas prices, it has had to reduce its forecast on severance tax revenue. The state is now looking to cut 4% out of next year’s budget, despite a current-year budget surplus. According to the state’s Economic Analysis Division, each dollar drop in natural gas prices costs the state about $226 million in revenue.


State severance taxes may be volume-based, value-based, or a hybrid of the two. When prices are high and the demand for commodities like oil and gas is robust, it is no coincidence that states with rich mineral deposits that tax extraction have weathered the economic downturn better than others.

Texas has managed to survive price fluctuations over the years and is one of the few states that does not impose an income tax. Texas, like New Mexico and Alaska, has created an endowment that was originally based on mineral lands to support K-12 and higher education. Some of the “newer” shale gas states, such as Pennsylvania and Ohio are concerned that severance taxes might chase away producers. But, high severance taxes have not hampered exploration in Texas, which levies the highest tax rate.

Yet another Bridge to Nowhere?

Alaska got a lot of attention several years ago when members of Congress belittled and then stripped the funding for the infamous “Bridge to Nowhere.” You would think the issue would have faded away as quietly as the Alaskan wildnerness, but the state’s penchant for building bridges to places with few inhabitants has actually been reborn in the Knik Arm Bridge Project, or the Bridge to No Where Part 2. And this time it’s not only members of Congress who are skeptical– locals are pushing back on this new project with lots of facts.

I’m not Alaskan, so it’s not my place to argue whether building a two-mile bridge to an undeveloped area would spur economic growth in the future. But I can look at the proposed public-private partnership that’s financing the project and say that Alaskans will bear all the financial risk and private participants will get a great part of the gain. As was said frequently during the financial crisis, the losses will be socialized and gains will be privatized. This is two-mile long extension of that maxim.

After reading a number of documents related to the Knik Arm Bridge, I estimate the cost to be about $1.5 billion. The Alaska Legislature created a public agency called KABATA in 2003 to create a method to finance the construction, operation and maintenance of the proposed bridge. KABATA has sought Congressional funding and low-cost loans from the U.S. Department of Transportation and is now pursuing a unique setup whereby a private firm builds the bridge and maintains it but bears no financial risk. It’s not clear why it’s necessary to have a private firm involved; after all there is really no privatization involved.

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