DENVER – With just days left in the legislative session, state lawmakers are addressing a “crisis” following a Colorado Supreme Court decision that found the state owes tens of millions of dollars to the oil and gas industry.
How that will impact local governments that benefit from severance tax dollars remains unclear, though observers say counties such as La Plata will see less money. One estimate from legislative staff says severance taxes will decrease by about 13 percent annually given the ruling.
The April 25 unanimous decision by the Supreme Court found that the state incorrectly disallowed a deduction related to transportation, manufacturing and processing costs.
At issue was the cost of capital.
BP America filed the case, pointing to technology it created in the 1980s in Southwest Colorado for producing natural gas from coal seams. The company built facilities and transported gas, and so it claimed deductions on the cost of capital associated with transportation and processing, which the state incorrectly prohibited.
Current estimates place refunds at around $115 million, though it is unclear how many companies are owed money. Given the ruling, companies are working through their tax filings to determine whether they can send the state a bill.
“They’ll (local governments) probably be receiving less because now that you can deduct some of those business expenses ... there’s going to be less coming to the state in terms of revenue,” said Sen. Kent Lambert, R-Colorado Springs, vice-chairman of the Joint Budget Committee.
“This was not what they (the Department of Revenue) expected coming out of the Supreme Court,” Lambert continued. “This just came up, there’s no instructions. ... We’re doing the best with what we have right now.”
Lawmakers introduced legislation Monday to address the looming refunds. They have until Wednesday, when the legislative session ends, to find at least a temporary solution.
The measure would pull from reserve funds to cover initial payments needed in the upcoming fiscal year. The Senate gave initial approval to the bill Monday evening.
Democrats also are pushing last-minute legislation that would prohibit companies from claiming the deduction in the future. That bill passed a Democratic-controlled House committee Monday evening, but it faces an uphill battle in the waning hours.
Counties and municipalities are carefully watching the situation, pointing out that they have already taken a hit on severance taxes.
Over 10 years, severance taxes have been raided to the tune of $362 million. The money – generated from production of minerals such as natural gas and oil – is partly meant for local governments to address impacts by the oil and gas industry.
“This is pretty difficult timing considering that the economy is down. ... And now, there’s going to be less revenue going forward,” said Kevin Bommer, deputy director of the Colorado Municipal League.
“I expect the industry to work with local governments in which they operate to determine whether or not impacts are being sufficiently mitigated. If that means looking at our overall system of deductions and credits, then that’s something we should do, not because we have a gun to our head, but because it’s the right thing to do.”
Stan Dempsey, president of the Colorado Petroleum Association, was cautious about moving too fast to change the tax law.
“We have to separate what the impact might be versus whether this is good tax policy,” Dempsey said. “Like any other business, we don’t tax the inputs, we don’t tax the things that are necessary to improve the value of the gas.
“This is just like any other tax code in terms of not paying taxes on your expenses.”