Study: Energy policy can be either boon or bane

Proper tax and other policies can help both states and local governments maximize the benefits of fossil-fuel development while minimizing the challenges posed by its volatility, a new report concludes.

The report, released by the Montana-based Headwater Economics nonprofit research group, points to both Colorado policies, and more specifically those in Garfield and Mesa counties, to make its point.

Garfield County lost more than 1,000 oil and gas and other mining-related jobs from 2008 to 2009 as drilling activity diminished, the report says. That’s a 36 percent decline. Building permits for residential construction in 2009 in the county were down 90 percent from where they were in 2002.

Yet the county government’s revenue continued to climb into 2010, and it set aside large reserves that grew from an inflation-adjusted $58 million to $105 million from 2006-10, the study said.

That was made possible by Garfield voters’ decision in 1996 to “de-Bruce,” repealing Taxpayer’s Bill of Rights restrictions that would have limited new revenue from natural gas production.

The TABOR restrictions remain in place in Mesa County, which barred it from collecting revenue during the time of rapidly growing economic activity, the report said.

“The consequence is that the county has not been able to keep pace with growing capital facilities and service needs, let alone invest in economic diversification,” the report says.

The report notes that local municipalities that rely primarily on sales taxes largely miss out on the property tax revenue that places like Garfield County reaps from energy production. It suggested that revenue-sharing be considered across energy-impact zones.

The report focuses on Colorado, Montana, New Mexico, Utah and Wyoming. It said mining compensation, including energy development, shrank 16.1 percent from 2008-09, the most of any job sector in the region. But while big swings in oil and gas prices result in volatility in drilling activity, tax revenue from that activity “continues to accrue long after most jobs have left a region,” making it “the longest-lasting economic legacy of fossil fuel development,” the report says.

However, Colorado taxes the industry at a low rate and unlike Wyoming has failed to save for the future in a permanent fund, the report notes. It points out that Colorado lets producers write off local property tax against their state severance tax liability. In 2008 Colorado voters rejected a measure that would have eliminated that write-off, raised the severance tax and directed most of the new revenue to college scholarships.

The report said a comparison of recovering drilling rig numbers counter claims that Colorado has attracted less drilling activity than neighboring states since its newly updated oil and gas rules took effect in 2009.

“Rig activity trends during the recovery indicate that price (for commodities) — not policy — is the primary determinant of levels of oil and gas development activity,” the report said.

It also contends that states can raise tax rates on the industry with little fear of reduced production or job losses because oil and gas companies are guided chiefly by where reserves are. It also calls for policies to address energy development impacts on “those amenities essential to long-term economic prosperity such as scenery, water, and air quality.”

David Ludlam, executive director of the West Slope Colorado Oil & Gas Association, said that both commodity prices and government policies drive the region’s energy business.

“Local, state, national and international energy policies together have tremendous influence over the cost of energy while regional policy often dictates where capital investment flows in low price environments. As a result, the West Slope Colorado Oil & Gas Association will continue working for sensible energy policy here in western Colorado that keeps our local natural gas sector competitive with the rest of the world,” he said.

The Headwaters Economics report may be found at


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