I spend parts of the year in western Colorado, where the oil and gas boom is causing the local economy to behave in ways that don't always track the rest of the nation's. For example, the housing boom is only starting to tail off here, and local businesses have a hard time finding employees because the oil patch pays much higher salaries for minimally skilled positions.
But in one respect, Colorado is like everywhere else: It has businesses complaining that higher taxes will drive them to other states. And no one cries louder than... the high-paying energy industry!
Now, even in this "drill, baby, drill" age, it should be apparent that oil and gas producers are not going to pull up stakes and head for New Hampshire or Indiana. If they want to drill, they have to go where the resources are.
For now, those untapped oil and gas deposits are in Colorado, Wyoming, New Mexico, Utah and Montana. And guess what? Colorado has the lowest effective tax rates on energy production among those states.
According to a study by Montana-based Headwaters Economics, an independent nonprofit research group, as of 2006, the rates ranged from 6.2 percent in Colorado to 15.9 percent in Wyoming.
So in effect, the companies that have been flocking to Colorado to bid for new oil leases are saying, don't raise our taxes or we'll leave — for states with the same or higher tax rates. (The industry says wells in high-tax Wyoming are more efficient and productive, so they can still better afford to operate there.)
It remains to be seen whether the companies will pull their rigs if their taxes go up. But the impact is clear when states pursue low-tax policies to attract more energy development. It has been... well, it's been lower taxes and lower state revenues — not more drilling.
According to a news report on the Headwaters Economics study:
Wyoming considered reducing its production tax rate to attract more industry investment, but decided against it. Yet the state is experiencing an energy boom, and reaping the benefits of keeping its taxes higher, [Headwaters staff member Mark] Haggerty said.
Montana, in contrast, cut its energy taxes, but there’s no evidence that increased energy production resulted, and it gave up about half a billion dollars in tax revenues in the process, he said.
Meanwhile, the states pay higher costs — for schools, road maintenance, environmental impacts and law enforcement driven by the influx of energy development.
No state should discount the potential impact of taxes on economic development, but as the energy boom shows, taxes are only one factor in determining where businesses locate.
— Charlie Quimby