News surfaced last week that the oil industry has been dodging its Colorado 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% 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 the less regally endowed director of the COGCC, expressed surprise the production reports were necessary for tax calculations. This is indeed surprising, since 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 that 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 swindling had been going on. The present severance 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 non-reporting fines was unthinkable because that isn’t the relationship the state has with the industry. Has a greater understatement ever been spoken, no matter how unintentional and lacking in irony? 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 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%. 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%. Had the state had an effective 9% rate last year, the tax would have been well over half a 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.
It recommended an effective 9% 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 7,000 wells and Anadarko about 6,500. 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.
We recommended the money generated from this tax money 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% of all wells in the state were now stripper wells. By definition they are wells that produce fewer than 15 barrels of oil or 90,000 cubic feet of gas on a daily average over the course of a year. There is 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 for a stripper well. Add to this that the state does not aggregate these wells for tax assessment purposes. Thus, if Noble, out of its 7,000 wells, had even 50% that were strippers that were producing gross revenue of $300,000 each, that would amount to over $1 billion in gross revenue that was escaping just taxation.
See if you can get this deal. You don’t pay any income tax on your first $300,000 of income. Your wife can even make $300,000, as can each of your four children through a trust, and none of it is taxed. Only the value of your property would be taxed. Wait for the look of disbelief on the tax man’s face if you even dared trot out such a proposal.
Thinking even bigger about the larceny afoot, if 88% 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 gross revenues escaping any state taxation might total about $10.6 billion annually.
Our legislation would 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 tax 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.
We brought this legislation to the attention of certain legislators in 2018. It was not welcome. The excuse then was SB 19-181 was being pushed, and there was no room for more environmental lawmaking. Had the law been in effect last year and this, perhaps as much as $1 billion would have been deposited in the state trust fund. The estimated cost of closing and maintaining wells abandoned by bankrupt frackers is in the many billions.
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 public for approval on the ballot. This excuse may have more to do with the Democratic leadership’s blind hate of TABOR as destructive of good government than it does with public approval. 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.
Perhaps, the Solons at 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 insolvency if something serious isn’t done to protect the public from the prospect that many of the frackers will go belly up and leave their poisonous legacy behind for future generations to manage.
Lord Acton, often quoted, said, power corrupts, and absolute power corrupts absolutely. The oil industry is in the absolute quadrant, with much assistance from state government.
This opinion column does not necessarily reflect the views of Boulder Weekly.