CHEYENNE, Wyo. – The Wyoming Department of Revenue (DOR) announced Monday that it expects drastic reductions in severance tax and ad valorem mineral tax revenues as a result of the dramatic decline in oil and natural gas prices.
Director Ed Schmidt said that lower gas prices are having an immediate impact on severance taxes deposited into the state’s general fund. Because of the timing of when ad valorem mineral taxes are collected, the lower tax revenues will begin to significantly impact local government and education budgets in the last quarter of 2010.
“The difference in revenue between production year 2008 and 2009 is going to be a severe shock,” Schmidt said. “Obviously it would be prudent to begin planning now for the impact the reduced revenues will have beginning in 2010 – 2011.”
Production year 2008 was a historic high for mineral values in Wyoming and around the world, Schmidt said. “The state’s mineral values reached an all-time high of $20.3 billion in production year 2008,” he said. “In production year 2009, Wyoming will be very fortunate if the gross mineral value approaches $9
to $10 billion.”
In the last decade, booming natural gas prices have been the real driver of mineral values in Wyoming. In 2008 alone, natural gas prices accounted for 59 percent of all mineral taxes in Wyoming. In production year 2008, the average price of natural gas reported to the DOR was $6.89 per million cubic-feet (mcf).
“Gas prices in the first quarter of 2009 are only one third of what producers were receiving in 2008,” Schmidt said. “If actual prices in the future months of 2009 don’t improve substantially, the average
price will more likely be in the $2 to $3/mcf range.”
Schmidt said state agencies are beginning to feel the pain of reduced severance taxes going into the state’s general fund. County and local government budgets still appear healthy because they are derived from the banner production year of 2008.
“Ad valorem taxes on minerals are only reported on an annual basis the year following the year in which oil, gas and coal are produced,” Schmidt said. “For example, the DOR will certify the mineral values
for production year 2009 to local governments on June 1, 2010. That is when county commissioners will first be able to really see just how much mineral values have fallen off from the previous year.”
Once the DOR certifies mineral values for the previous production year, county commissioners then prepare their budgets and set mill levies. County treasurers then mail out tax bills in September and the first installment of taxes is due no later than November 10.
“Mineral severance taxes are reported and paid to the DOR within two months after they are produced and are immediately deposited into the state’s general fund for distribution,” Schmidt said. “We first
began seeing large reductions in oil and natural gas prices reported in the forth quarter of 2008, which immediately had a negative affect on general fund revenues.”
In its October 2008 forecast, the economic analysts in the Consensus Revenue Estimating Group (CREG) predicted that oil would be at $75/bbl and natural gas at $5.50/mcf.
CREG’s forecast was reduced downward in January 2009 to $40/bbl for oil and $3.75/MCF for gas. In the first quarter of 2009, gas prices have continued their freefall into the $2.75/mcf range.
“The initial CREG forecast had estimated mineral revenues would be much higher,” Schmidt said. “This is why the Governor has taken immediate steps to cut state agency budgets.”
In addition, lower gas prices also negatively affect federal mineral royalties, another major source of funds going to state and local governments and to the School Foundation program which funds K-12
schools in Wyoming.
Schmidt said it is likely that the K-12 school system will begin to feel the impact of reduced mineral tax revenue at about the same time as the counties, starting in late 2010.