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Severance Tax

Table of Contents

Background

Colorado’s severance tax was enacted in 1977.1  The severance tax is imposed on the production or extraction of metallic minerals, molybdenum, oil and gas, oil shale, and coal.  Taxes are collected by the Department of Revenue.  For filing instructions, visit the Colorado Department of Revenue’s severance tax website.  Severance tax revenue is subject to the spending and revenue limitations of TABOR.

 

Tax Rate

Severance tax rates vary by mineral type as follows:

Tax Base
Tax Rate
Coal2
Assessed on the amount
produced per quarter in tons.
First 300,000 tons are exempt each quarter
Over 300,000 tons at a rate published monthly by the Department of Revenue
Metallic Minerals3
Assessed on gross producer
income.
 
First $19 million are exempt
Over $19 million at 2.25%
Molybdenum4
Assessed on the amount
produced in tons.
 
First 625,000 tons are exempt
Over 625,000 tons at 5¢ per ton
Oil and Gas5
Assessed on gross income.
Deductions are allowable
for transportation, manufacturing
and processing done prior to sale.6
Up to 15 barrels per day (oil) or 90,000 cubic feet per producing day (gas) are exempt
Under $25,000 at 2%
$25,000 to $99,999 at 3%
$100,000 to $299,999 at 4%
Over $300,000 at 5%
Oil Shale7
Assessed on gross proceeds;
based on years of operation.
Only applicable 180 days after production begins
The greater of the first 15,000 tons per day or
the first 10,000 barrels per day are exempt
First year at 1%
Second year at 2%
Third year at 3%
Fourth year at 4%

 

Tax Credits

Property tax credits are allowed against a company's state severance tax liability by mineral as follows:

Tax Credit
Credit Amount
Coal
50% of the severance tax liability for coal produced by underground mines and an additional 50% for lignitic coal.8
Metallic Minerals
Property taxes paid capped at 50% of the state severance tax liability.9
Oil and Gas
87.5% of all property taxes paid except those imposed on equipment and facilities used for production, transportation, and storage.11
Prior Payment for Impact Assistance Value of approved contributions to assist in solving local government severance impact problems.10

Additionally, a property tax credit is allowed for contributions to local governments to mitigate social and economic impacts tied to mineral development activities.12

 

Distribution

Under current law, the first $1.5 million in severance tax revenue goes to the Innovative Energy Fund.  The figure below provides a general illustration of how remaining severance tax revenue is allocated under current law.

severance_tax_distribution.jpg

Severance tax revenue is divided evenly between the Department of Natural Resources (DNR) and the Department of Local Affairs (DOLA).13  DNR's half is deposited into the Severance Tax Trust Fund, where it is “held in trust as a replacement for depleted natural resources, for the development and conservation of the state's water resources, and for use in funding programs that promote and encourage sound natural resource planning, management, and development related to minerals, energy, geology, and water and for the use in funding programs to reduce the burden of increasing home energy costs on low-income households.”14  Severance tax revenue to the Severance Tax Trust Fund is divided equally between the Severance Tax Perpetual Base Fund and the Severance Tax Operational Fund.

The Perpetual Base Fund is used to finance loans for state water projects administered by the Colorado Water Conservation Board that construct or improve flood control, water supply, hydroelectric energy, and recreational facilities, excluding domestic water treatment and distribution systems.15  The Operational Fund is generally used for programs administered by DNR.16  The fund’s "core" or "tier 1" programs include programs administered by the Colorado Oil and Gas Commission; the Avalanche Information Center; the Colorado Geological Survey; the Division of Reclamation, Mining and Safety; the Colorado Water Conservation Board; and the Division of Parks and Wildlife. In the last several years, money in the Operational Fund has funded other "tier 2" programs, including water and agriculture-related programs, clean energy development, soil conservation, wildlife conservation, invasive species control, and low-income energy assistance.

DOLA's severance tax revenue is credited to the Local Government Severance Tax Fund and distributed to local governments.17  Seventy percent is available for discretionary loans and grants to local governments socially or economically impacted by the mineral extraction industry.  Local governments apply to DOLA for the loans and grants at three different times during the year.  DOLA is assisted by a 12-member Energy and Mineral Impact Assistance Advisory Committee in making funding decisions.  The money must be used for the planning, construction, and maintenance of public facilities, and for the provision of public services.  The remaining 30 percent of the money received each fiscal year is distributed directly to local governments by August 31 of the following fiscal year based on the geographic location of energy industry employees, mine and well permits, and overall mineral production.

 

Federal Taxes

There is no federal severance tax.  However, the federal government collects revenue from companies that lease federal land for mineral production.  This revenue is called federal mineral leasing revenue (or FML). States receive about half of this revenue.  In Colorado, FML revenue is allocated to state agencies, public schools and local governments for planning, construction, and maintenance of public facilities for public services.18

 

State Comparisons

As of 2012, 36 states levied some form of severance tax, including 31 states with a tax on the extraction of oil and gas.19  Taxes are imposed differently across states, where some tax a fraction of the market value of production, others tax the volume produced, and some states tax a combination of both the value of production and amount produced.  A 50-state summary of oil and gas severance taxes can be found here.

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1Article 29, Title 39, C.R.S.
2Section 39-29-106, C.R.S.
3Section 39-29-103, C.R.S.
4Section 39-29-104, C.R.S.
5Section 39-29-105, C.R.S.
6 Section 30-29-102 (n), C.R.S.
7Section 39-29-107, C.R.S.
8Section 39-29-106 (3) and (4), C.R.S.
9Section 39-29-103 (2), C.R.S.
10 Section 39-29-107.5, C.R.S.
11Section 39-29-105 (2), C.R.S.
12Section 39-29-107.5, C.R.S
13Section 39-29-108 (2), C.R.S.
14Section 39-29-109 (1), C.R.S.
15Section 39-29-109 (2) (a), C.R.S.
16Section 39-29-109.3, C.R.S.
17Section 39-29-110, C.R.S.
18Section 34-63-102 (1)(a)(I), C.R.S.
19Pless, Jacquelyn. 2012. “Oil and Gas Severance Taxes: States Work to Alleviate Fiscal Pressures Amid the Natural Gas Boom.” NCSL. http://www.ncsl.org/research/energy/oil-and-gas-severance-taxes.aspx#state
 
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