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A Good Use for Severance Tax Revenues

Sen. Lyle Hillyard is sponsoring legislation that would annually deposit oil and gas severance tax revenues above $41 million into the permanent state trust fund. Interest from the permanent state trust fund would be used for long-term capital projects.

Currently, the disposition of severance tax revenues is to the state's general fund where it is appropriated for ongoing general state expenditures.

In FY2006, the state collected $71.5 million in oil and gas severance tax revenues. Had the law been in effect for FY2006, $41 million would have been transfered to the general fund and $30.5 million would have been transfered to the permanent state trust fund.

This proposal is long overdue.

Utah, like many states, imposes severance taxes on oil and gas production. Oil is taxed at 3% up to $13 per barrel and 5% above $13 per barrell. Natural gas is taxed at 3% up to $1.50 MCF and 5% above $1.50 MCF. For example, if the well-head price of oil is $50 per barrell, the first $13 is taxed at 3% and the next $37 is taxed at 5%.

Depositing severance tax revenues into a trust fund is better than appropriating these revenues for ongoing general fund purposes for several reasons. Severance taxes are imposed on oil and gas (and minerals as well) because these resources are non-renewable and removing ("severing") these minerals from lands within the state represents a permanent reduction in state resources. By transfering a portion of severance tax revenues to a trust fund, the state will have a financial resource even after the oil and gas resources have been depleted.

Additionally, severance tax revenues are very volatile due to significant fluctuations in prices and production levels for oil and gas, and relying on volatile revenue sources for ongoing government services is not good budget policy.

Years ago, western states like Wyoming and New Mexico established trust funds into which severance taxes are deposited.

The timing of Sen. Hillyard's proposal is excellent. Since general state revenues have been growing and continue to grow at very high rates, the state can easily shift a portion of severance tax revenue from ongoing operations to the trust fund without negatively impacting current government operations.

Sen. Hillyard's proposal was recommended by the Tax Review Commission and was unanimously approved today in Interim Revenue and Taxation Committee.

It's for the children.

and the grandchildren.

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