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Energy Taxes' Faustian Bargain

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February 8, 2009

During budget crunches, politicians often sic the taxman on the villain of the hour. Elected officials know that this is a simple way to simultaneously raise much-needed revenues and criticize political bogeymen. The problem, though, is the method's inevitable Faustian bargain.

States that fund health care programs with cigarette or alcohol taxes, for instance, make their health care systems dependent on people smoking and drinking. Those that fund schools with gaming revenue make their education system's improvement contingent on an already debt-saddled public increasing its recreational gambling.

Now, with companies like Exxon Mobil reporting record profits, state lawmakers from the Ozarks to the California coast are looking to plug budget gaps with a similar levy - the severance tax that 39 states charge energy companies when they remove (or sever) oil, gas and coal from the ground.

New efforts to create or raise these taxes are aimed at strengthening state programs and weakening the power of oil and gas companies. But they could ultimately do the opposite by tying those programs to an inconsistent cash stream and by inadvertently making energy-industry allies out of traditionally progressive constituencies like teachers, health care activists and public-infrastructure advocates.

Revenuewise, it's easy to see why severance taxes are an attractive target in an era of belt-tightening. Energy companies are making big profits, and severance receipts have doubled in the past five years to almost $11 billion nationwide.

Creating or raising these taxes may help states find more money for the schools, roads, bridges and social safety-net programs they are under pressure to cut.

Yet, as a long-term funding source, severance revenues have been as erratic as the commodity prices they are based on. After the 1986 oil price collapse, for example, the Energy Department reported a 33 percent drop in state severance tax receipts. Last year in Wyoming, where severance taxes already make up more than a third of all government revenues, officials voiced concern when a fleeting dip in natural gas prices depleted state coffers by $500 million. If the floor again drops out under energy prices, the public priorities that have been made to rely on new severance taxes could suffer.

It's also easy to understand the argument from environmentalists who say that by raising severance taxes and cutting into energy industry profits, the industry's outsize political influence will decrease. But that's contingent on the structure of the tax itself. If, as a 2006 California ballot initiative proposed, new severance revenues are put into renewable energy research, it very well might weaken the fossil fuel lobby's political clout by funding its green competitors.

Unfortunately, though, that's not how many severance taxes work. States typically put the money toward health care, education and transportation instead of devoting the revenues exclusively to energy programs (i.e., renewable energy development, weatherization, etc.). That means severance taxes could legislatively strengthen the very companies that severance tax advocates want to challenge. How? By giving those firms a political shield.

Just as Exxon Mobil tries to sow goodwill with Olympic advertisements about its charity donations, oil and gas firms are happy to cite the programs their severance tax dollars support as reason for legislators to oppose stronger regulatory controls on water quality, air pollution and greenhouse gas emissions.

"The industry has waged successful campaigns that give the impression that if you don't support oil and gas, you don't support education," says Jerome Ringo, president of the Apollo Alliance, a clean-energy advocacy organization backed by labor unions and conservation groups. "If they need to use our children as a mechanism of promoting their agenda and blocking regulation in the future, they will."

For their part, energy companies seem to know that once revenue for popular programs comes from them, politicians become less likely to try to regulate them, knowing that such regulation might enrage the interests that rely on their revenues (if, for example, a school is funded with oil taxes, a legislator's anti-drilling regulation may have teachers lobbying against it). Thus, many oil and gas companies have either supported or only tepidly opposed initiatives lashing their taxes - and therefore their political fate - to social and infrastructure spending.

In Arkansas, for example, a 2008 bill raising severance taxes to pay for road and school improvements was supported by major energy companies and originally spearheaded by a former gas executive.

In Colorado, energy companies officially opposed Democratic Gov. Bill Ritter's unsuccessful 2008 ballot measure raising severance taxes to finance new college scholarships, but they seemed far more worried about his attempt to regulate drilling in a state that has become the epicenter of a natural gas boom.

"I had a lot of conversations with CEOs of the major gas and oil producers, and the conversations were singularly about the regulations, unless I brought up the severance tax," he said in an interview.

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David Sirota is a full-time political journalist, best-selling author and nationally syndicated newspaper columnist living in Denver, Colorado. He blogs for Working Assets and the Denver Post's PoliticsWest website. He is a Senior Editor at In These Times magazine, which in 2006 received the Utne Independent Press Award for political coverage. His 2006 book, Hostile Takeover, was a New York Times bestseller, and is now out in paperback. He has been a guest on, among others, CNN, MSNBC, CNBC and NPR. His writing, which draws on his (more...)

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