The 2000 LEGISLATURE'S TAX "INCENTIVE" STUDY
      As part of HB 274 (1999), the last major tax break for oil production, the Legislature authorized a study of severance tax breaks to determine whether they were effective.
      The legislation provided $150,000 for a study, which was then conducted by the University of Wyoming Department of Economics and Finance.
      The UW economists divided the study into two parts: oil and gas, and coal. In each case, they researched the tax structures imposed on the industry and also created an industry model capable of predicting the effects of changing tax rates within certain parameters.
      The oil and gas model showed that cutting Wyoming's oil severance tax from 6% to 4% reduces the present value of oil severance tax revenues by 14%, while generating an increase in production of less than one-half of one percent (compared to a long-term "base case" of what would likely happen without any changes).
      Similarly, a percentage point increase in the tax rate still would reduce production by less than one percent, but boost oil and gas severance tax collections by 17% compared to the base case.
      The coal model showed that a reduction in the severance tax rate of 7% to 5% would lead to a tiny increase in coal production (half of one percent), coupled with a 27% reduction in severance tax revenues ($31 million).
      One of the main reasons behind the minimal effect of tax breaks on production is that state taxes are deductible from federal taxes. A state tax break just means the producer pays more to the federal government.
      Thus the Wyoming Legislature sent oil and gas revenues to Washington, D.C. instead of to Cheyenne and to Wyoming's cities, towns and counties.
      Second, because severance taxes are paid on production, a severance tax break provides little incentive for the exploration and drilling activities that must come first.
      In the case of coal, which is transported by rail, there is a third factor - the market power of the railroads.
      Research indicates that reductions in coal prices are absorbed by railroad freight rate increases, so the end consumer sees no difference in price and thus makes no changes in its decisionmaking.
      The executive summaries and complete texts of the UW tax incentive study can be viewed at: http://w3.uwyo.edu/~mkunce/ExecSum.pdf and http://w3.uwyo.edu/~mkunce/StateReport.pdf
      Despite the data on coal production and revenues and the results of the Legislature's own study, legislation to restore coal severance taxes to near historical levels (HB 68) failed introduction in the 2002 session.
      The House Revenue Committee also voted down an amendment to the "omnibus" revenue bill to raise coal severance taxes to historical levels (and also subsequently killed the revenue bill).
      However, the House Revenue Committee also killed HB 178, Coal Severance Taxes - Amendments, to create a new coal severance tax break. View the votes to introduce HB 68 and HB 178.