Severance taxes that Michigan and other states levy on extractive industries are used for a variety of purposes, from funding pollution cleanups to supporting public education, according to a new study.
Most of the $57 million that Michigan collected in severances taxes on extractive industries in 2010 went into the state’s general fund, according to the study by Public Sector Consultants,* a Lansing-based research firm.
“There is significant variation among states in the way that they use natural resource production taxes,” according to the study, which the Center for Michigan commissioned this summer.
The most common uses for severance taxes imposed on extractive industries, according to the study, include:
* Sharing revenues with local communities where natural resources are harvested.
* Funding schools.
* Dedicating revenues to pollution cleanups and conservation programs.
* Maintaining state "trust" funds that allow for special projects.
* Paying states’ bills during periods of budgetary distress.
Michigan levies a 5 percent severance tax on natural gas wells, a 6.6 percent tax on oil wells and a 1.1 percent tax on low-grade iron ore mining operations. There are no severance taxes, however, on non-ferrous mining companies -- those that extract sand, gravel, coal or precious metals such as gold, nickel and silver.
Up to $1 million per year in severance taxes that Michigan collects from extractive industries goes into a fund used to close and clean up abandoned oil and natural gas wells. The bulk of severance taxes, paid by oil and natural gas producers, goes into the state’s general fund. Some of that revenue is allocated to the Michigan Department of Environmental Quality’s Office of Geological Survey -- the agency that regulates oil and gas exploration and mining in the state.
DEQ critics have long called that funding arrangement untenable.
“When you have an industry that is charged with regulating and promoting an industry, you have an inherent conflict of interest,” said Marvin Roberson, a forest ecologist with the Sierra Club’s Michigan chapter.
In fiscal 2010, 77 percent of funding for the Office of Geological Survey came from taxes and other fees levied on oil and natural gas companies and mining operations, according to state data.
DEQ Director Dan Wyant said the funding arrangement doesn’t compromise the agency’s ability to regulate industry. “I don’t think it’s fair to say that because we charges fees we are beholden to these regulated communities,” he said.
Wyant said other divisions within the DEQ, which aren’t funded by taxes on the oil drillers and mining operations, are involved in regulating those industries.
User fees now fund many of Michigan’s regulatory programs. Those fees were enacted to offset deep cuts in conservation funding over the past decade, Wyant said. Michigan ranked 47th nationally in 2006 in conservation funding, according to a recent Michigan State University study. State support of conservation programs has been further reduced since then.
In addition to severance taxes, Michigan also collects tens of millions of dollars annually in other business taxes and royalties that companies pay on the oil, natural gas and other minerals extracted from state land. Local units of government also collect property tax revenue from extractive industries.
The Public Sector Consultants study focused strictly on severance taxes, the rates levied on extractive industries, and how states use the resulting revenue.
Alaska, the nation’s largest oil-producing state, uses its severance tax revenue to support the state budget. While the nation’s largest producer of natural gas, Texas, uses severance tax revenue to support the state budget and fund economic development programs.
Arizona, home to the nation’s most productive mining industry, imposes one of the nation’s highest severance taxes. The revenue is distributed to communities across the state.
Georgia, which is the nation’s top state for logging, has no severance tax on timber harvesting operations.
Michigan is one of a several states that don’t levy severance taxes on nonferrous (non-iron) metallic mines. That means the state’s newest metallic mine, Kennecott Eagle Minerals’ controversial Eagle mine near Marquette, will only pay local property taxes and state business taxes.
Kennecott also will pay the state royalties for metals the company mines at the site near Big Bay, a portion of which lies on state property. Those royalties could total $100 million over the life of the mine, according to one state estimate.
Minnesota, which ranks eighth nationally in mining, has one of the nation’s highest severance taxes. The state levies a production tax of $2.38 per ton of taconite, iron sulfides and low-grade iron that is extracted from the ground. The resulting funds are distributed to communities and schools across the state.
Minnesota also levies a 3-cent per ton fee on high-grade iron. Those funds are distributed among 14 state programs focused on education, economic development and environmental protection.
Despite its relatively high severance taxes on mining, Minnesota’s revenue from those taxes totaled just $24 million in 2010. That was less than half the revenue that Michigan’s severance taxes provided. The reason: Michigan collects most of its severance tax revenue from the oil and natural gas industry, which is much larger here than it is in Minnesota.
* CLARIFICATION: A review of the PSC report led to revisions to sections involving the logging sector in February 2012. The changes, in summary, are made to reflect the following points:
1. Michigan has two tax-related programs. Both of which function as incentives rather than revenue generators, despite one of them being called a "specific tax."
2. The only source of net revenue generation is the state's sale of timber on state-owned lands, and those are deposited in the Forest Development Fund.