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Every Day’s a Holiday for the Oil Business in Colorado

Fracking operation near subdivision in Erie, Colorado. (Cut the Plastic.)

Though it’s not on the official Colorado state calendar, every day’s a holiday for the oil industry in this state.

News surfaced last week that the oil industry has been dodging its state taxes, and not just now and then, but systematically.  The tax, called a severance tax, is based on a small percentage of the gross proceeds from oil and gas sales each year.  A recent state audit, the source of these revelations, shows that in the years 2015 through 2018 roughly 85 percent of the 420 active operators in the state failed to turn in the required monthly production reports.  In all, over 55,000 reports are said to be missing.

Jeff Robbins, the self-anointed “Czar” of all things oil and gas in the state, and also, officially, the less regally designated Director of the Colorado Oil and Gas Conservation Commission, COGCC, expressed surprise the production reports were necessary for tax calculations.  This is a jaw-dropping admission for several reasons, not least of which is the fact that the COCGG’s budget is derived from severance tax revenues.  In recent years the COGCC has had to go to the legislature for funding since the severance tax was inadequate to fund its budget of roughly $14 million.

Enquiring minds, even those of a Czar-like nature, might wonder why an industry that assures us it contributes billions to the state’s economy each year didn’t pay enough in taxes to fund a small agency that primarily keeps the industry’s oil rigs clanging and the oil and gas pipelines flowing to points of use outside the state.  Little of it is used here.  Colorado is very much an oil colony.

Czar Robbins went on to say that he didn’t think the lost tax revenues could be recovered because of a one-year statute of limitations.  Perhaps that is why he showed no interest in how many years this big-time swindle had been going on. The present severance tax law has been in effect since 1978.

He went on to say that the $308 million the State Auditor said could have been collected in fines for non-reporting was unthinkable because that isn’t the relationship the state has with the industry.  Lacking any sense of irony or self-awareness, his is the clear leader for headbanger understatement of the year.  As ex-governor Hickenlooper liked to say, the relationship between the state and the industry was more a business partnership based on mutual respect.  It was not that of a regulator.  That philosophy lives on.

Neither did Robbins express much interest in recapturing what was unpaid within the last year.  On this, like so many other things, Czar Robbins is perhaps a little confused.  Defrauding the government is considered serious business in most jurisdictions, and the clock doesn’t start running until the crime is exposed.  That was last week.  We could wait for Attorney General Phil Weiser to intercede, for he promised to be a lion in defense of the people.  But his report card is marked with absence after absence.  It may be that the people will have to sue both the state and the industry.

The audit report also showed that the effective tax rate for the severance tax in Colorado is .54 percent.  But this is old news.  A state audit several years ago showed the state’s severance tax rate was the lowest of all western states.  It was 18 times lower than North Dakota’s, which has an effective rate of 9 percent.  Had the state an effective 9 percent rate last year the tax would have been well over one half billion dollars.  The actual average tax has wavered around $60 million in the last few years., though in at least one of those years most of the tax was returned to the industry because of a state supreme court decision awarding them more subsidies.

The grassroots group I belong to, Be the Change, drafted legislation in 2018 in response to the earlier audit report on the severance tax rate.

We recommended an effective 9 percent tax rate.  The primary motivation was concern over the closing and maintenance costs of the roughly 100,000 wells in the state, only 40,000 of which are producing.  The present bonding is totally inadequate, $100,000 for all wells in an ownership.  Noble Energy owns about 7000 wells and Anadarko about 6500.  The state closed a few abandoned wells last year, reportedly at an average cost of over $200,000 apiece.  Recently, one well in Canada cost about $5 million to close.

The money generated from this tax money we recommended be deposited in a trust fund to cover all future closing costs of old wells that are abandoned or need rehabbing.  Engineering studies show wells have to be reclosed on an average of every 20 years—cement breaks down and steel corrodes.  The legislation called for the establishment of a state green bank to hold and loan these monies out for green projects within the state until needed for well closing.

We also recommended that the tax exemption for small producing wells, called stripper wells, be eliminated.  Last week Czar Robbins announced that about 88 percent of all wells in the state were now stripper wells—horizontal wells start to peter out rapidly, usually in less than 2 years.  By definition strippers are wells that produce less than 15 barrel of oil or 90 thousand cubic feet of gas on a daily average over the course of a year.  There is obviously much room for gaming in such a formula.

Given present oil and gas prices each stripper well could theoretically produce gross revenues in the $300,000 range, provided production for both oil and gas was at the legal maximum.  Add to this, that the state does not aggregate these wells for tax assessment purposes.  Thus, if Noble, out of its 7000 wells, had even 50 percent of its wells that were strippers, each producing $300,000 in gross revenue, that would come to over $1 billion in gross revenue escaping just taxation.

See if you can get this deal.  You don’t pay any state income tax on your first $300,000 of income.  Your spouse can even make $300,000, as can each of your 4 children through a trust, and none of it is taxed.  Only the value of your property is taxed.  Wait for the gimlet-eyed taxman, if his type still exists, to break out the cuffs for the whole family if you were to even propose such a cockamamie scheme.

Thinking even bigger about the larceny afoot, if 88 percent of the wells in the state are stripper wells as Czar Robbins declares, all producing to their maximum, and the inventory of all producing wells is 40,000, then the theoretical maximum gross revenues escaping any state taxation might total about $10.6 billion annually.

Of course many wells are not producing at their stripper maximum, for various reasons, so the actual tax subsidy to the oil industry is less by some unknown quantity for any one year, but, since this subsidy has been in place for many decades, the actual subsidy over time is much, much greater.

Our legislation would also have stopped any severance tax from going back to the counties of origin or to the state water fund.   Yes, some of the severance tax goes to keep water buffalo fantasies alive at public expense.

Local governments already assess a property tax on the industry.  Weld County, for instance a few years back, collected about $500 million from the industry in property taxes.  The state collected about $45 million in severance tax that year.

State law allows the industry to deduct most of these local property tax payments from their state severance tax bill.  As a result, oil producers in Weld County have paid nothing in state severance taxes in some years; yet, the county always received severance tax returns from the state.  Weld is by far the largest oil and gas producing county in the state.

We brought this legislation to the attention of certain legislators in 2018.  It was not welcome.  The excuse was SB 181, then being debated, was a major environmental bill, and there simply was no room for more environmental law making in the session.  SB 181 is the much-ballyhooed oil and gas reform act that promised oil development would only be allowed if it could be demonstrated the people and the environment were being protected.  It is being slowly drowned in a sea of incompetence and fear biting by a  bungling administration.

Had the severance tax bill not become a victim of political calculation it might have brought in as much as $1 billion in deposits to the proposed state trust fund over last year and this.

Now the excuse at the legislature is that the public would never support it.  Since the bill is a tax increase, it would have to be referred to the pubic for approval on the ballot.  The Taxpayer’s Bill of Rights, TABOR, requires it.  This excuse may have more to do with the Democratic leadership’s blind hate of TABOR as destructive of representative government than it does with public approval.  The argument in a nutshell is that TABOR took away the legislature’s right to tax as representatives of the people.

Admittedly, TABOR is flawed. It has elements that need serious reform.  But TABOR is a constitutional amendment, by initiative, by a direct vote of the people, expressing their desire to have a vote on whether their taxes are to be increased.  In this state the right of the people to legislate via the initiative is a first right, superior even to that of the legislatures.  The people-as-sovereigns is the real burr under the saddle for many Solons.  They would be well advised to work for reform of TABOR rather than its repeal, for the public is not likely to give up its first right to participate directly in government.  The narrative herein partly explains why.

Plus, everybody hates being taken for a ride, but people won’t know about the ride their being take on, for it’s a figurative one, unless you tell them and provide a remedy.  A just increase in the severance tax and the elimination of unjustifiable subsidies is a remedy.

Perhaps, the Solons at Denver’s Colfax and Broadway need a little Fireside Chat with FDR so they could be reminded that the only thing they have to fear is fear itself—and that the state could achieve long-enduring insolvency if something serious isn’t done to protect the pubic from the prospect that many of the frackers will go belly up and leave their poisonous legacy behind for future generations to manage.

The brain numbs at the maze of deals carved out by the legislature and hidden inside the state tax system for the oil industry.  Why wasn’t the miniscule tax rate and numerous operational subsidies enough? Why would the industry risk exposure of this rotten, sweetheart deal making by not reporting honestly on the little it did owe?  Lord Acton, often quoted, said, power corrupts, and absolute power corrupts absolutely.  The oil industry is in the absolute quadrant, with devoted assistance from state government.

 

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PHILLIP DOE lives in Colorado. Doe is a co-sponsor of a public trust initiative that would turn the tables on the permitting process by making those seeking to use public resources, air, land, and water, to first demonstrate that the proposed use would not irreparably harm those resources–the reverse of the present permitting process. He can be reached at:ptdoe@comcast.net

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