Utah Taxpayer

The Senate Revenue and Taxation Committee unanimously voted to move SB18 and SJR2 -- both sponsored by Sen. Lyle Hillyard -- to the Senate second reading calendar for floor debate. This is good news.

What the bills do
SB18 creates the Oil and Gas Severance Tax Holding Account. Oil and gas severance taxes above $41 million will be deposited in this account. In FY2006, the oil and gas severance tax generated $71.5 million which means that $30.5 million would have been deposited in the holding account had SB18 already been enacted.

SJR2 is a proposed constitutional amendment. If passed by two-thirds of each house, signed by the Governor, and approved by a majority of voters, oil and gas severance tax revenues in excess of $41 million will be deposited into the permanent state trust fund created in conjunction with the November 1998 settlement with tobacco companies. Interest from the trust fund can be spent annually by the Legislature. To spend the principal, three-fourths approval of each house and concurrence from the governor are needed.

If SB18 becomes law but SJR2 does not, the holding account will still be created, but the principal will not have the same level of protection. Future legislatures and governors could access the principal and/or eliminate the account with a simple majority in each house and support of the governor.

Why does Utah impose severance taxes on oil and gas
Some tend to describe severance taxes as a tax on natural resources, but the rational basis for the tax is that an economic resource -- which happens also to be a natural resource -- is being depleted.

Why are SB18 and SJR2 good ideas?
Currently, severance tax revenues are deposited into the general fund. Depositing at least a portion of these revenues into a restricted account or a constitutional trust fund makes sense for at least two reasons:

- Considering the rational basis for the severance tax, which is to offset the permanent depletion of an economic resource, placing these revenues into a trust fund creates a permanent asset that offsets a permanent depletion. Wyoming and other states have created permanent trust fund for their severance tax revenues and now have a permanent asset that yields annual interest.

- Severance tax revenues are very volatile, and using volatile revenue sources to fund ongoing general fund expenditures is not good tax policy. In FY2002, oil and gas severance taxes were $18.9 million but increased to $71.5 million in FY2006.

Possible amendments
In addition to severance taxes on oil and gas, Utah imposes severance taxes on metals such as copper and beryllium. Traditionally, these revenues have been much lower than oil and gas severance taxes, but revenues have increased in recent years from $4.9 million in FY2002 to $17 million in FY2006. Sen. Howard Stephenson mentioned the possibility of including these revenues in the trust fund as well, and Sen. Hillyard expressed interest in amending his bill to include these.

For more information about severance taxes
The Utah Taxpayers Association annually publishes a Utah Tax Summary containing information on Utah's major state and local taxes. Click [here] to view the document and go to pdf page 7 of 16 to get more details on oil and gas severance taxes. Page 8 of 16 has information on metal severance taxes.

Disclaimer: Like all legislation, SJR2 and SB18 may eventually be modified, meaning that the above points may no longer be 100% relevant.

Posted by Utah Taxpayer on Wednesday, January 17, 2007 at 4:45 PM | Permalink