Wyoming Tax Formula Creates Massive Fund, Not Industry Exodus

By Molly Severtson
April 2, 2009

One of The Policy Institute’s priorities in the 2009 legislative session has been the repeal of Montana’s oil and gas tax holiday, which has cost the state more than $500 million in revenue since 2003. In "Montana’s Oil and Gas Tax Holiday: Analysis and Recommendation for Change" (here), we report that, according to recent academic studies, production tax rates have little effect on industry investment and activity. In fact, location of reserves is the major factor influencing energy companies, along with price, access to markets and technology. In the past and throughout this session, oil and gas industry representatives have offered neither substantive rebuttal to these studies nor evidence to the contrary.

Three bills asking the oil and gas industry to pay a more fair share have been introduced this session, the latest of which is HB 675, sponsored by Rep. Brady Wiseman, D-Bozeman. Wiseman’s bill would repeal the 18-month holiday for new horizontal oil and natural gas wells and deposit the increased revenue into a trust fund that would help fund state school equalization aid while reducing property taxes.

Opponents of the bill offer the well-worn argument that eliminating the holiday will push the oil and gas industry away from Montana to states with a presumably more favorable tax landscape. With that argument in mind, it’s instructive to look at the reality of one of Montana’s closest neighbors: Wyoming.

Unlike legislators in Montana, Wyoming lawmakers have not been afraid to ask for the state’s fair share of mineral revenues As a result, both the mineral industry and the state treasury in Wyoming have flourished.

In 1974, under the leadership of Republican Governor Stan Hathaway, Wyoming voters approved an amendment to the state constitution establishing a 1.5% excise tax on the gross value of extracted coal, petroleum, natural gas, oil shale, and other minerals, the proceeds of which are deposited into the Permanent Wyoming Mineral Trust Fund (PWMTF). The investment returns of the PWMTF are deposited annually in the state’s general fund. The value of the fund, which also occasionally receives direct appropriations from the Wyoming Legislature, is expected to exceed $4 billion by summer 2009.

In addition to underwriting various infrastructure projects, including the construction of new schools and libraries and improvements at universities and recreation centers, the fund provides Wyoming with a degree of protection against the volatility of a natural resource-based economy and recessions like the one we’re currently facing.

Over the years, there has been much debate as to whether money from the PWMTF can or should be used for purposes beyond deposits to the general fund and whether money intended for the PWMTF could be directed to other accounts. A 2006 legislative resolution specified all monies deposited in the fund to be inviolate. Efforts in 2007 and 2008 to use funds destined for the PWMTF for state road improvements failed.

In light of the current economic crisis and projected state revenue shortfalls, tapping into the massive account again became attractive to legislators who decided during the 2009 session to divert half of an additional 1% mineral severance tax (over and above the constitutionally-mandated 1.5%) to the Spending Policy Reserve Account, a holding account for the PWMTF, over the remainder of the biennium. This amounts to $64.8 million that may eventually flow into the corpus of the PWMTF, but if necessary, can be used to offset revenue shortfalls.

While arguments over the use of the fund and its dividends are sure to persist, it’s clear that Wyoming’s willingness to ask its mineral industry to pay its fair share has greatly contributed to the economic health of the state. We’re sorry that the 61st Montana Legislature has failed to do the same.