State living with energy tax decisions made 30 years ago

Votes came with oil embargo, long lines still fresh in people's minds

The Rocky

Published December 12, 2007 at 6 p.m.

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Photo by Matt McClain © The Rocky

Former Colorado Gov. Richard Lamm passes back quizzes to students in his public policy class at the University of Denver. Lamm was governor in 1977 when the current severance tax on energy and mining production was put into effect.

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During the waning days of the 1977 state legislature, the nine members of the Senate Finance Committee took two votes on a severance tax on oil and gas that set the course for Colorado to this day.

And those on the losing end - at least those who are still with us - argue that the votes were shortsighted and left the state ill-equipped to deal with the current energy boom.

At the time, Democrat Dick Lamm was in his third year as governor, but the Republicans had recaptured control of the House and Senate. The state was embroiled in a tax revolt and the OPEC oil embargo and long lines at gasoline stations were still fresh in many minds.

The agenda for that April 26 committee meeting focused on a bill to impose Colorado's first severance tax on mining and oil and gas companies.

The tax, proponents said, would raise money to deal with the impacts of a surge in energy workers on the Western Slope, as well as the day when the state's energy resources were depleted.

Mining production was booming and oil shale development lurked in the future. Natural gas production was not yet a big factor.

Even in 1977 Colorado was late to the game, with surrounding Western states already collecting millions of dollars a year from energy extraction. But prior attempts to impose an energy tax had gone down to defeat in the face of partisan politics and heavy lobbying from industry.

The five Republicans and four Democrats on the committee sat around a long table in a musty room in the basement of the state Capitol debating changes to the bill.

Just after 3:15 p.m., Sen. Joseph Schieffelin, a Lakewood Republican and the bill's co-sponsor, moved that part of the money should automatically be deposited in a state rainy day fund that lawmakers could not spend at will.

Schieffelin told his colleagues that he didn't trust future lawmakers to keep their hands off the money.

"If you set up a state trust fund so future state legislatures could say, 'Let's take these dollars out of the trust fund,' I think you have defeated the idea of a trust fund," he said. "The purpose of the trust fund is to give all the citizens of the state and future generations an interest in the depleted resources."

Scheiffellin's motion failed, but his words would prove prescient.

Three decades later, Colorado has only about $20 million left out of the $2.5 billion it has collected since 1980. In contrast, Wyoming and New Mexico have multibillion- dollar trust funds.

About a half-hour after the first vote, Sen. Barbara Holme, a Democrat from Denver, implored her colleagues to at least cut in half a tax break that would allow oil and gas companies to avoid paying much of the severance tax. Simply put, the break allowed the companies to deduct what they paid in county property taxes from their state severance tax bill.

"I want to try to be equitable and fair," Holme told the other committee members.

Holme's measured failed, too, by a vote of 6-to-3.

That vote cost the state hundreds of millions of dollars in lost tax revenue over the intervening decades.

Now, with the state once again experiencing an energy boom, an interim legislative committee has worked much of the year with an eye toward overhauling the severance tax system.

Severance taxes on oil and gas and mining began surfacing in the early part of the 20th century as a way for state governments to capture part of the revenue from the exploitation of nonrenewable resources within their borders.

Flamboyant Louisiana Gov. Huey Long was an early advocate, imposing a severance tax to raise money to build bridges, roads and a university system for the rural parts of his state.

As exploration moved West, so did the tax. Utah imposed one in 1955 and Wyoming enacted a tax on coal in 1969.

By the mid-1970s, Colorado was the only Rocky Mountain state without a severance tax. The effort to change that began when Lamm was elected governor in 1974 and the Democrats won control of the House, partly on a pledge to switch part of the tax burden from residents to businesses.

"I don't think it was retribution or punishment or anything like that," said then-House Majority Leader Robert Kirscht, at the time a Pueblo Democrat. "But I think there was a feeling that the industry didn't pay its way. I'm sure down deep some people just wanted to stop the development of it if they could."

In his first year in office, Lamm pushed the legislature to pass a bill that imposed a severance tax on energy and mining companies and increased liquor and business income taxes. In return, the state would eliminate the 3 percent sales tax on food.

Residents in Leadville, home of the massive Climax molybdenum mine, threatened to secede from Colorado and create their own state if the tax was imposed.

The bill was killed in the Republican- controlled Senate.

Lamm tried again in 1976. This time the bill made it through both houses before dying in a conference committee as the session ended.

Frustrated, Lamm launched that summer a petition drive to put the severance tax on the ballot. Again, he linked it to the elimination of the sales tax on food.

Lamm recalled that then-Rocky Mountain News Editor Michael Howard confided that the ballot measure was a slam dunk.

"He told me once I got that on the ballot it was impossible to lose because of the dynamics of it," Lamm said. "I was offering people to take the sales tax off of food and replace it with a tax against a very narrow group of interests, which any objective person felt wasn't paying enough taxes."

Howard was wrong.

The measure was buried by a vote margin of more than 2-to-1. The opponents, mainly energy and mining companies, raised about $350,000 to contest the measure, while Lamm's forces spent about $15,000.

"That's when they did the chocolate-covered lemon on me," Lamm said.

The former governor was referring to the opposition's television ads showing a chocolate-covered Easter egg that opened up to contain a lemon, representing higher prices if the measure passed.

"It was a real shock to me to lose that (vote)," Lamm said.

By the next year, however, Republicans realized that a severance tax was inevitable. Rep. Mick Spano, an Arvada Republican and self-described opponent of such a levy, worked with the industry to come up with what he called an "acceptable tax."

"I have been in opposition to a severance tax all along," Spano said then. "But it doesn't mean, to take a phrase from baseball, that you can't play the game, and I'm here to play the game."

On Feb. 16, 1977, Spano introduced his bill before the House Business and Finance Committee. Over the next hour and a half, before a packed committee hearing room, he walked legislators through the tax, using charts and handouts to explain how oil and gas, coal and other mining activities would be assessed.

He estimated the tax would raise $16 million the first year.

"I would thank such a friendly audience on such an innocuous bill," Spano quipped during his presentation and the crowd erupted in laughter.

He offered his own vision of setting aside half the tax money for a permanent fund to deal with the impacts of energy exploration and to replace the revenue once resources were exhausted.

"The money we will get from a severance tax will be used for protecting against future impacts we may have here in the state," Spano explained. "Once we have exhausted our minerals, we can rely on the interest from these funds to continue our projects."

He also explained how the generous credit against property taxes paid to counties made sense, that it would ease the financial burden on industry.

"I don't think we should start off with too much of a punishing tax," he said.

As he neared the end of his presentation, his voice began to rise.

"The governor wants a reasonable tax. This is a reasonable tax," Spano said, pounding the table with a rolled up stack of papers.

At the time, most lawmakers were focused on the mining industry and its expected boom. Oil production, except for oil shale, was in decline.

None of the major energy companies testified against the bill, although they urged lawmakers to ease the tax levels.

"We have no objections to the concept of severance taxes," Pete Korth of Gulf Oil told the House committee. "(But) we feel it's a little high."

City managers and directors of city and county associations, however, pleaded with lawmakers to increase the amount of money given directly to Western Slope governments to ease the impacts of development.

"As this irreplaceable mineral is gone, what is local government going to do?" Routt County Commissioner J.A. Utterback asked. "They are going to be out there naked."

Local governments would eventually end up getting 50 percent of the severance tax revenue.

For the next two and a half months, Spano, relying on baseball analogies, ushered the bill through a maze of committee meetings and legislative sessions, protesting changes and maneuvering to defeat proposed amendments.

When Spano died in 1999, colleagues cited the tax bill as a hallmark of his 10-year legislative career.

The idea of creating a permanent fund came up repeatedly throughout debate on the bill.

Sen. Schieffelin pointed out that Nebraska was earning more on interest annually from its fund than was collected each year when it first imposed the tax.

Spano told lawmakers that Texas had a $1 billion fund used to finance higher education.

But state Rep. Anne Gorsuch, R-Denver, argued against a permanent fund, saying it was unrealistic.

"It gives lip service to the idea of a perpetual trust fund, knowing full well that the perpetual trust fund may not exist beyond the next legislative session," said Gorsuch, who later would become secretary of the U.S. Environmental Protection Agency under President Reagan.

Others argued that at a time when residents were burdened with high property taxes and needed relief, the money was needed right away.

"I think we should put it all in the general fund," said state Sen. Ron Stewart, D-Boulder.

In contrast, there was little debate on the property tax credit given to oil and gas companies.

The credit dates back to the early 1950s, when oil and gas production in Colorado was taxed as part of an energy company's income tax. Companies could apply 100 percent of the property taxes they paid to individual counties as a credit against the state income tax.

During Lamm's failed attempts to pass severance tax legislation, the governor often railed against the generous credit. Before the house passed the bill, Democrats on the floor tried to cut the credit to 50 percent of county property taxes, but it lost in a vote along party lines.

Spano's bill reduced that credit to 87.5 percent, with most lawmakers apparently agreeing that reducing it further would confuse county tax assessors.

"We would create chaos in some counties with high production numbers," Spano maintained.

In reality, however, as Holme pointed out during the hearings, reducing the credit would have no impact on county tax collections. The counties would assess and collect their property taxes just as before - the difference would be in the amount of money the state received.

When the Senate Finance Committee approved the bill, Holme was the lone dissenting vote.

About a week and a half before the bill was passed, another provision of the severance tax that haunts today's legislative leaders was thrashed out before the House Committee on State Affairs.

Legislators had decided that half of the money collected would be divvied out to cities and counties impacted by energy and mining development.

But a gusty debate arose over who would decide who gets the money and what constituted an impact.

Felix Sparks, then director of the Water Conservation Board and a former justice of the state Supreme Court, argued that those decisions should be left to the state Department of Local Affairs, not lawmakers.

That troubled Rep. Wayne Knox, D-Denver, especially the broad definition of impacts.

"I'm a little frustrated," Knox told the committee. "We're acting rapidly on something that has very broad implications.

"If we give a pretty broad delegation of authority, not necessarily limited to energy impact projects, not with any fairly precise definition of what energy-impacted projects are . . . (it) really could be just about anything."

Sparks won the day, but Knox proved prophetic.

Millions of dollars from the growing pot of severance tax money has been used to build recreation centers, libraries, museums and other public works projects in most of the state's 64 counties.

In any event, Lamm, who'd fought long and hard for what he deemed a fair severance tax package, was so displeased with the final bill that he wouldn't sign it. The measure become law without his signature on May 27 and it went into effect the following year, 1978.

The final version of the law did contain a requirement that part of the severance tax be put into a permanent fund, but the provision had no teeth.

The next year's legislature wasted no time raiding it, recalls Jim Evans, former director of the Northwest Colorado Council of Governments.

"For years, they would borrow the money that was in the trust fund over the protests of all the West Slope legislators," Evans said. "Then, the next year, they would pay it back and borrow it again. That happened for four or five years in a row."

Eventually, lawmakers took it all.

The same fate happened to another $100 million fund created in the 1970s with the state's share of the lucrative federal leases for oil shale development in northwest Colorado, said former state Sen. Tillie Bishop, R-Grand Junction.

The money was slated to ease the impacts from oil shale development in four northwest Colorado counties. The counties had to apply to the legislature's Joint Budget Committee each year to use part of the money.

"My god, we had fight after fight after fight," Bishop said.

Finally, Senate Majority Leader Ted Strickland, R-Westminster, got fed up with the "marathon battles" over how to distribute the trust fund money, said Bishop, now a University of Colorado regent.

He challenged the counties to come back with a plan on how to use the money, thinking they would never come to any agreement. But they did and "held Ted to his word," Bishop said.

So in 1981, the legislature gave the entire $100 million away.

Bishop said one of the four counties, Mesa, spent its share immediately on a new road and bridge and a new airport. Only Rio Blanco County put its money into a trust fund that still exists.

Within two years, the oil shale industry collapsed on an infamous "Black Sunday" of mass layoffs and abandoned housing projects. With it went the revenue stream.

In the ensuing decades, severance taxes leveled off at about $30 million to $40 million a year and almost became an afterthought in the state legislature or was looked at as a source of emergency funds.

The last major change to severance taxes took place in 1995, when the legislature redirected how the money was spent. It gave half the money to the state Department of Local Affairs to dole out in grants and lump-sum payments to cities and counties.

The other half went to the state Department of Natural Resources. That, in turn, was split in half between funding the operations of four state agencies and providing money for water loans.

The water loan funds are the closest the state has come to setting aside severance tax money for the future, as lawmakers had initially envisioned.

"Yes, that was the theory," Lamm said. "I don't think the theory survived very long. I think at the first economic downturn, they cannibalized the money."

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