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Tax Revenue, not Employment, Is Lasting Benefit of Energy Extraction in the West, Says a New Report

A new report by Headwaters Economics, a research organization based in Bozeman Montana, says the longest lasting economic benefit from oil, gas, and coal extraction comes from taxes, not from jobs. Jobs in the energy sector are often filled by transients who leave after a field is developed and goes into the production stage, but tax revenues continue to accrue during production. The report generated instant controversy with its recommendation that severance taxes on energy production be increased and that the monies collected be distributed more equitably to local governments to mitigate impacts of energy development on public infrastructure and the environment. The report also asserts that increasing taxes would not deter exploration and drilling. “A growing body of research indicates that taxes have little or no effect on where and when industry chooses to drill for oil and gas,” the report says.


The Western Energy Alliance, an industry trade organization, begs to differ. The report minimizes "the economic contribution of oil and natural gas, rather than celebrating the fact that it is one of several industries that together create significant jobs and economic activity across the West," a spokesperson for the alliance told the Caspar Star-Tribune,

The report examines the period of 2003-2008, and looks closely at the impact of the great recession on energy extraction in Montana, Wyoming, Utah, Colorado, and New Mexico. Among those states there is a wide variation in tax and mitigation policies. But nothing, ultimately, could insulate any of them from the recession. In the five state region, the number of active drilling rigs dropped by 191 percent from June of 2008 to May of 2009, a vivid measure of the recession’s impact.

Wyoming, where 37 percent of gross domestic product is generated from energy and mining, is most severely buffeted by ups and downs of energy prices. And during the recession, Wyoming suffered the biggest drop in personal income of the five states. Mining and energy generate 9 percent of GDP in New Mexico; in Colorado 5 percent, Montana 4 percent, and Utah 2 percent. The Headwaters report notes that Wyoming taxes fossil fuel resources “more effectively than its peers, capturing more value from each dollar of production value.” Nonetheless, the state was not insulated from the sharp downturn in energy prices and had to make a 10 percent across-the-board budget cut.

Perhaps more important than tax rates, the reports notes, is how tax revenues are distributed and spent. “Severance taxes are designed to achieve two main public policy objectives," the report notes "to compensate the public for impacts of extraction activities on infrastructure, communities and the environment; and to build up reserves to compensate for the depletion of non-renewable resources.” Wyoming did not do well on spending to mitigate local impacts on regulation, roads, local police, emergency and health services, according to the report. Montana did the best at mitigating impacts, returning 50 percent of total production taxes to local governments.

We’ll come back to this report in the near future with an interview with the report’s author, Julia Haggerty.



Last modified Tue, 5 Jul, 2011 at 5:55