Tax & Royalty Revenue
Tax and royalty revenues from oil and natural gas are critical funding sources for local, state, and federal governments. We often hear from opponents that the oil and natural gas industry needs to pay its fair share. But like many other accusations, this one turns out to be unfounded. The oil and natural gas industry is the second largest source of revenue to the federal government after the IRS. It also returns significant revenue from federal lands.
• For every dollar the government spends administering the federal onshore oil and natural gas program, companies return $54.12 in royalties and leasing revenue to the American taxpayer.
• IHS Global Insight reports that in 2010, independents operating onshore alone generated $38.4 billion in corporate taxes, severance taxes, and federal royalty payments.
• The Tax Foundation finds that governments have collected $1.95 trillion in taxes from the oil and natural gas industry since 1981. The total amount of taxes collected is roughly 40% more than the industry’s combined profits. Tax collections exceeded company profits in 23 of the 27 years surveyed.
• On top of direct industry taxes , consumers paid $1.1 trillion in excise and sales taxes on petroleum products from 1981 to 2008.
Revenue from Oil & Natural Gas Supports Local Communities
In the West, states and counties rely on a healthy oil and natural gas industry to balance state budgets and fund education, public safety, and infrastructure projects. Most states require companies to pay severance, property, and other types of taxes as well as royalties on the energy they extract. In addition, western states have school trust funds that are funded by productive activities like oil and natural gas development on state lands.
In communities like Uintah County, Utah, where 50% of jobs and 60% of wages are tied to oil and natural gas production, industry helps to diversify local economies, many of which are otherwise dependent on low-wage seasonal tourism for their economic well-being. Oil and natural gas development helps keep communities together by creating jobs that allow young people to remain close to family instead of heading to major metropolitan areas to find employment.
• In New Mexico, total tax and royalty payments from oil and natural gas production in 2013 totaled nearly $1.8 billion, approximately 32% of the state's general fund. Oil and natural gas generated 97% of the revenues from state trust lands for schools.
• In Utah, oil and natural gas development contributed $65 million from state lands, 61% of the total $106.4 million generated for the State Permanent School Fund.
• In Wyoming, mineral development from the state’s trust lands contributed $219 million, 93% of the total in 2012, to the Common School Permanent Fund.
• In North Dakota, the industry contributed $2.65 billion in state revenue. The school trust fund increased by $842.5 million from 2011 to 2013, with 75% of the funding, $628.75 million, from the industry and the majority of the remainder from investment income and capital gains.
• In Colorado, oil royalties from school trust lands were at a record high in 2013, up 25% because of horizontal drilling in the Niobrara formation.
• In Montana, over the last five years the oil and natural gas industry has contributed $160.6 million to the state’s trust lands fund, a quarter of the total. See our Western Oil & Gas Employs America portal for jobs and economic impact data from western exploration and production in every state, county and congressional district across the nation.
Royalty Rate and Fee Increases
Currently, the Bureau of Land Management (BLM) is contemplating an increased onshore royalty rate from 12.5% to 18.75%, along with higher leasing fees, civil penalties and bonding requirements. Western Energy Alliance opposes the plan since the current lower royalty rate reflects the added cost the federal government imposes on public lands development. With myriad bureaucratic processes and regulations, development and production on federal lands is considerably more expensive than corresponding state and private lands.
The justification from the government is often that the American taxpayer is not getting a “fair” return; offshore rates are 18.75%; and state rates are higher. Taking those in turn:
• Oil and natural gas producers provide an excellent return to taxpayers. Onshore producers return $54.12 in royalties and lease revenues for each dollar spent by the government administering the federal onshore program. That’s an excellent rate of return.
• Comparison of the federal onshore rate to the offshore rate is misleading. The reserves found onshore are significantly different from the conventional reserves offshore in the Gulf of Mexico. Unconventional reserves on public lands in the West are less productive and expensive to develop, and the 12.5% royalty rate reflects that difference.
• Administration officials often compare the federal onshore rate to states such as Texas, which have a higher royalty rate in certain instances. That comparison does not take into account the fact that these states have a regulatory and permitting environment that takes years less and otherwise encourages production. State permitting is done within an average of thirty days, versus several months and in many cases years by the federal government. The federal government has chosen to extract more cost in the form of regulation; it then cannot logically expect to extract a larger royalty rate as well.
Increasing the royalty rate would make federal lands prohibitively expensive. Many producers are already choosing not to develop on federal lands, and a higher royalty rate would further drive investment away from federal production. Just as when you tax something more you get less of it, a royalty rate increase would result in less federal revenue from development of the energy resources all Americans own.
Tax and Royalty Comments
Below are comments submitted by Western Energy Alliance on various tax and royalty issues.
- 10/3/2017 - ONRR Regulatory Reform Initiative Comments
- 6/2/2017 DOI Royalty Policy Committee Membership
- 5/4/2017 ONRR Oil & Gas Valuation Rule Repeal
- 6/19/2015 BLM Royalty Rate Increase Proposal
- 5/8/2015 ONRR Oil & Gas Valuation Rule
- 8/15/2014 ONRR Indian Oil Valuation Rule
- 7/21/2014 ONRR Civil Penalties Rule
- 7/18/2014 ONRR Civil Penalties Proposed Rule