Oil and gas tax incentives not needed

By Julia Haggerty and Mark Haggerty, Headwaters Economics, Bozeman
Originally posted as a guest column in The Missoulian
Posted on On Your Left with the permission of the authors

The Obama administration has proposed eliminating several federal tax breaks for the oil and natural gas industry. This raises an important question: Do tax incentives influence oil production? At a time of both record budget deficits and energy industry profits, both Montana and the federal government should look to the experience of other states for answers.

Many states are especially reliant on revenue from oil and natural gas. According the U.S. Census of Governments, severance taxes accounted for 74 percent of all state tax revenue in Alaska, 34 percent in Wyoming, and 9 percent in Louisiana in 2010. This reliance encourages close attention by states to the assessment of the effects of rates and incentives.

It is no accident that Alaska and Wyoming, the states most dependent on revenue from oil and natural gas, also have the highest tax rates on these fossil fuels. Each has learned that tax rates have a very small effect on production. In other words, rates do not change drilling rates or total production.

In the late 1990s, Wyoming's legislature passed a 2 percent tax break on production, hoping to induce more exploration and drilling. At the same time, it funded the University of Wyoming to study how these tax incentives would affect oil production.
Two years later, the Legislature rescinded the tax break. Oil and natural gas prices had begun a decadelong rise and fossil fuel resources were again flowing from Wyoming. High prices eliminated the need for incentives, and the state badly needed revenue.

The University of Wyoming research confirmed what the past two years showed: lower severance taxes could not, to any great extent, induce the industry to drill more; only higher prices could. The study also noted that higher taxes do not reduce production when prices are high.

For example, during the last decade natural gas production in Wyoming grew significantly faster than in Colorado, but Wyoming's effective tax rate was nearly three times higher (16 percent) than was Colorado's (less than 6 percent) in 2008.
Rather than taxes, fossil fuel production responds to opportunities determined by geology, price, and technology. Some industries, like textiles or automakers, can choose where they want to locate and can take their factory with them across state and national borders. The oil and natural gas industry does not have that luxury. Companies must drill where resources exist, and when price and technology support development.

In the Rockies, high natural gas prices in the mid-2000s supported the use of emerging technologies - seismic 3D imaging, horizontal drilling, and multi-stage fracking - to unlock previously unrecoverable resources and a natural gas boom followed. Now that oil prices are high and natural gas prices low, the same technologies are behind booming oil production in North Dakota and eastern Colorado.
As an example of a tax policy that accounts for the key drivers of energy production, Alaska provides incentives for exploration and technology to encourage the full development of resources, while calibrating production taxes to maximize revenue when prices are high. Production taxes begin at 25 percent and increase by 0.4 percent for every dollar the price of a barrel exceeds $30, and can reach as high as 70 percent.

Montana and the federal government should learn from these states. First, eliminating existing tax incentives will not noticeably affect production. Second, with high oil prices providing industry every incentive to drill, the time is right to eliminate these tax breaks, and to revisit oil and natural gas tax policy to learn what works and what does not to create jobs, encourage production, and provide a fair return to the treasury.

Let's Try Civility

By Pat Williams
The Policy Institute Leadership Seminar Series Convener

The Missoula City Club recently hosted Congressman Dennis Rehberg at one of our monthly public lunches. Congressman Rehberg was introduced by the president of City Club Board. As Dennis approached the podium, I arose from my chair, walked across the room and greeted him, the two of us, alone at the front of the room. We shook hands and exchanged a few words of friendship. I returned to my table, and Dennis began his presentation.

When the lunch had ended and I was leaving, a fellow stopped me and said, “Hello, Pat. I’m a Republican and I was surprised to see you walk up to Rehberg and shake his hand.” During the several weeks since that lunch, I have heard the same response from several others, “Are you and Rehberg friends?”

Twenty years ago, and for decades preceding that, such a greeting between members of Congress was commonplace. Party affiliation aside, members once respected each other and many were fast friends. The fact that some people attending that lunch seemed in a mild state of disbelief as they watched this former member of Congress, a Democrat, greeting the current congressman, a Republican, probably reflects more about today’s public mood than it does about their congressmen.

During the last half of my 18 years in the U.S. Congress, I recognized a significant change among many of my constituents in Montana. They were becoming very partisan, and it was reflected in their letters to me and also to the newspapers. Disagreements within and among those attending public meetings in Montana became common. Radio talk shows became forums for contention. A public rudeness was evident, not only in Montana but in other states as confirmed by my congressional colleagues from across the country.

It became evident — constituents had become more partisan than were their representatives. Many of my own constituents in Montana were far angrier and less willing to find compromise than was either I or my Republican colleague at the time, Congressman Ron Marlenee. Other representatives from across the country, both Republicans and Democrats, also began to notice the sudden ideological hardening of their constituents. Shortly thereafter members of Congress themselves began to reflect the mood of their voters and the effect was increased partisanship.

Soon, congressional Republicans and Democrats were at each other’s throats. A Speaker of the House, Jim Wright of Texas, was forced to resign by the crush of relatively minor charges of misbehavior. The person who chased him out, Congressman Newt Gingrich, was soon scandalized by both Democrats and Republicans and he too was forced from Congress. During the past two decades anger, retribution and — at times — ideological extremism have become almost commonplace. As with the games of ancient Rome, the feeding of the lions has only made the crowds scream for more.

In both the Montana Legislature and the U.S. Congress we have witnessed the election of candidates who in times past would have been roundly defeated at the polls because of their publically expressed extremism. The just completed Montana Legislature comprised many such people. Moderate members of that legislature, both Democrats and Republicans, agree with this; ask them, I have and find that people from both parties are appalled by the quirky actions of the recent Montana Legislature.

The question, of course, is who elected those people. Why, we did — you did; the angry voters did it. It is indisputable that most of those election victories were on the far right and reflect the anger and conspiratorial fears of those folks. However, none of us are immune from the political cancer that has invaded the body politic. We all must look in the mirror and accept our own responsibility — be it staying home on election day or writing nasty letters to the editor or making angry calls to talk radio. Let’s return to civility, respect and friendship.

Pat Williams served nine terms as a U.S. Representative from Montana. After his retirement, he returned to Montana and is teaching at The University of Montana.

Montana Climate Scientist Warns of Falling for "Happy Science"

By Eric Grimsrud
Retired MSU Professor and Climate Change Expert

Citizens of Montana are being misinformed on the single most important detail concerning the effects of our increasing levels of carbon dioxide on the Earth’s temperature.

I am referring to what is called the “sensitivity” of CO2, which is defined to be the temperature increase caused by a doubling of the CO2 concentration in the atmosphere. Direct measurements of temperature and CO2 levels over the past 700,000 years — as revealed by the ice core records of Antarctica and Greenland — show that the total sensitivity of CO2 is about 6.5 degrees Celsius. About half of this has been attributed to “fast” feedback effects (changes in water vapor and clouds) that become apparent in a few decades and the other half is due to subsequent “slow” feedback effects (such changes in the sheet ice of Greenland and Antarctica) that show up over the course of a few centuries. All of this is thoroughly explained in “Target Atmospheric CO2” in The Open Atmospheric Science Journal, 2008, volume 2, pages 217-231.

Magnitude of change

The most recent ploy of the professional deniers of CO2’s effects is to acknowledge that increased CO2 will cause an increase in temperature, but then claim that the magnitude of this effect will be too small to be of importance. An excellent example of this national effort is being provided in Montana by H. Leighton Steward who presents himself as a scientific expert on the subject of climate change. He is the director of EOG, a gas and oil company formerly known as Enron. He is also the spokesperson for a fossil fuel advocacy group called Plants Need CO2, whose advertisements have been shown frequently throughout Montana.

Steward assures us that the Earth’s temperature can increase by no more than 0.2 degrees Celsius — even if we let carbon dioxide levels increase without constraints during the rest of this century and into the next. Thus, he is claiming that the sensitivity of CO2 will always be less than 0.2 degrees C, far less than the measured magnitudes referred to above.

He bases his comforting prediction entirely on century-old, oversimplistic theory that is contradicted by modern physical principles and direct observations. His model is of no relevance to the real world because it accounts only for the absorption of infrared radiation by the greenhouse gases and does not also include the emission of this radiation by these same molecules. While this deficiency in Steward’s model becomes apparent upon inspection of any basic textbook on the subject, it is also revealed in the layperson-friendly article “Understanding Atmospheric Radiation and the Greenhouse Effect — Parts Two and Three” available on the web at www.scienceofdoom.com.

Disconnected from reality

In fact, the emission of infrared radiation in all directions by the greenhouse gases of the atmosphere is just as important as their absorption. That is why Steward’s predictions of CO2’s sensitivity are far too low and entirely disconnected from reality. In addition, the more correct model shows that the temperature effects of increased CO2 levels will continue almost endlessly into future decades and centuries — while Steward tells us that CO2’s effect is already “saturated” and, therefore, future generations need not be concerned about future increases in CO2.

Unfortunately, Steward’s lethal message appears to have been well-received and additionally amplified by powerful fossil fuel interests in Montana. I have tried to create a line of communication with both the Montana Petroleum Association and Steward in an effort to correct this critically important detail of future warming — without success. Therefore, I am sharing my own thoughts here directly with the citizens of Billings. Please beware of so-called “scientific experts” bearing tales of “happy science” that attempt to take CO2 emissions off the hook in our efforts to address climate change. While such presentations might be driven by legitimate and understandable financial concerns, they are also in direct opposition to the laws of Mother Nature and have a very high probability of leading to environmental catastrophes in the coming decades and centuries.

Eric Grimsrud, emeritus chemistry professor at Montana State University in Bozeman, lives near Kalispell. His website is www.ericgrimsrud.com.

Paying Our Fair Share

By Sen. Christine Kaufmann
The Policy Institute Board Vice-President and State Senator, District 41

Originally printed in the Helena IR April 14, 2011

In the next few days I will join with thousands of Montanans to make an investment in the common good. By pooling our resources we’ll increase opportunity for all Montanans and provide a strong foundation for our economy. That’s right, we’ll pay our taxes and we’ll get all those things that make our communities stronger and promote the kind of shared prosperity that our state depends on.

We get safe communities. I certainly could not pay for police and fire protection, clean air and water, a public health system to protect me from communicable diseases, a criminal justice system, or disaster services — all on my own. So I’m happy to join with my neighbors through government to ensure those services are there for all of us.

We get functioning communities. We are assured the children in our neighborhood are learning academic and life skills in the free public education system to help them participate productively in the social, economic and cultural life of the community. The financial systems function behind the scenes to allow for the creation of wealth. Social safety-net programs are there for our neighbors and for us when the economy doesn’t work equally well for all of us. We are all safer when our neighbors are secure. I could never pay for this on my own.

We get livable communities. They grow in a more or less orderly manner. Streets, sidewalks and trails seem designed to provide a way to get where we want to go. The infrastructure delivers water, heat and electricity and carries away garbage and human waste. There’s a thriving arts community and ready recreational opportunities. It doesn’t happen by accident. It happens when government teams up with the private sector to make it happen.

We all get safe, functioning and livable rural and urban communities. But who should pay for them? That is a central question in a democracy. The foundation of progressive policy is fair taxation. It is a necessary good. Those who benefit from public investment must contribute to it. Those who benefit more and have greater resources should contribute more.
It’s not fair that low wage earners have the same tax rate as the wealthiest in our community. It’s not fair that the oil and gas industry gets a tax “holiday” for the first 12 or 18 months of drilling when they are making huge profits extracting a nonrenewable resource. It’s not fair that owners of mansions pay the same property tax rates as their neighbors who are forced from their family homes by increased property values.

I introduced bills this session that would have addressed these inequities. Such policies are not popular — in either party. Politicians take polls and ask people and businesses if they like paying taxes and want to pay more. Not surprisingly, most of them say “no.”

It’s easier to pledge “no new taxes” than to start a conversation about safe, functioning and livable communities or how to make the tax system more balanced and fair. We can’t even pass bills to close tax loopholes in the system we have. The fact is taxes should be raised for some of us. The costs to support community structures and services we expect go up just like everything else. Without a system of fair and adequate taxation, everything collapses. We may not enjoy paying taxes, but if we love our state and our country, we should at least acknowledge it’s an investment worth making. Our lives depends on it.

Sen. Christine Kaufman’s district includes much of the west side of Helena and the Helena Valley.

Rich vs. Poor

By Ken Toole
President, The Policy Institute

The person who defines the question we ask defines the answer we get. In the Legislature the question is, what services must we cut?

But, the real problem is that more and more money is being concentrated in fewer and fewer hands. And those individuals are contributing less and less to the cost of public services.

This problem has been building across Republican and Democratic administrations for the last 30 years.

The super rich in our society want us to continue focusing on the deficit and Social Security at the national level and cutting school funding and human services locally. It keeps us from asking what we ought to expect from them as fellow citizens.

Just who are these "super rich" people? The top 1 percent of families in America control 34.6 percent of all the wealth in the country. The next 9 percent control another 38.5 percent. That leaves 90 percent of us with just 26.9 percent of all the wealth in the country.

For those individuals in the top one-hundredth of one percent, the average annual income is over $27 million per year. The bottom 90 percent of us earn a little over $31,000 per year. We have not seen this kind of "wealth disparity" since the turn of the century when the Robber Barons ruled the country. Guess what? They're back.

Though we have a two-party system, it really doesn't offer much of a choice. Historically, the two parties were different. The Democrats were the party of "Big Labor" and the Republicans were the party of "Big Business."

And these two interest groups had very different political agendas. But, as organized labor began to decline through the 1970s and 1980s, Democratic politicians turned to big corporations for financial support. And, of course, this began to effect how Democrats vote. Today, there is little partisan disagreement on the big three traditional themes of Big Business; privatize, deregulate and cut taxes.

As a result, taxes on the very wealthiest Americans have been reduced through both Republican and Democratic administrations. The top income tax rate levied on the wealthiest Americans dropped from 66.4 percent in 1945 to 32.4 percent in 2010.

We have deregulated everything from banks to electricity to home mortgages. We have privatized public services from custodians to prisons, enabling corporate interests to generate profits in these "new markets".

All of this has encouraged wealth to concentrate in fewer and fewer hands while the middle class has dramatically lost financial ground.

Here in Montana we are not insulated from the national trend. In 1999 the Legislature cut the rate on business equipment in half. While the measure helped some small businesses, the lion's share of the tax cuts went to the very largest corporations in Montana, among them the most profitable oil companies in the world.

In the middle of a budget crisis in 2003 the Montana Legislature cut both the income tax rate on the wealthiest Montanans and the capital gains tax levied on those fortunate enough to have income from an investment portfolio.

The non-partisan Montana Budget and Policy Center reports that just two years later over half of the money from the income tax rate cuts alone went to families earning over $500,000 per year.

These cuts, among others, have helped to shift the cost of paying for public services to Montanans who work for a paycheck. But, we are not hearing about that in this legislature. In between the goofy bills about guns and succession from the Union, all we hear about is the need for more and more cuts to services.

Almost no one dares propose increasing taxes on the wealthy or big corporations. Instead all we hear about is cutting services and who gets hurt. Imagine how different this debate would be if the question was, how do we make sure everyone is paying their fair share?

End of Session Update

Thanks so much to the Partnership for Montana's Future for providing this end-of-session update, and for all your hard work during this tumultuous session.

Federal Funds
Virtually all federal funds have been restored to health and human services. Although the federal funds were not designated in the amendatory veto, enough was added back to fully restore federal funding for Supplemental Nutrition Assistance, Low-Income Energy Assistance, and Title X Family Planning.

DPHHS
• The current budget restored $123 million to DPHHS, brining the current total to roughly $23 million below the governor’s proposed budget.
• Cuts to Healthy Montana Kids, Big Sky Rx, and personal services for seniors and people with disabilities were fully restored.
• Tobacco use prevention, which was eliminated entirely in the Legislature’s original budget, was restored to $9.4 million for the biennium, reflecting $7 million in cuts from the governor’s originally proposed budget.
• Although federal funding for family planning was restored, state funding appears to still be eliminated in the final budget.

K-12
Base aid funding for K-12 public schools throughout the state was cut by $5 million compared to the governor’s proposed budget. We are awaiting additional information regarding other potential cuts in K-12. The result will likely be laid off teachers and staff, larger classrooms, compromised quality, and larger local property taxes.

Higher Education
The final budget negotiated by the governor restored $15.5 million in funding to higher education in Montana. The higher education budget is still approximately $15 million under the governor’s originally proposed spending levels. Tuition increases may be necessary to make up for the cut in state funding, putting higher education further out of reach for Montana families.

Pay Plan
The Legislature cut a $21 million pay plan for public employees that do the work that keep our communities safe, healthy, and educated all across the state. This is the first time in history that the Legislature has rejected a proposed pay plan that the unions and the governor bargained as the law directs. By fiscal year 2013, base salaries for state employees will have been frozen for five calendar years. Additionally, the legislative rejection of the bargained pay plan could jeopardize all future pre-session negotiations.

Cuts Were Unnecessary
Although we should take a moment to appreciate our successes in fighting back the worst of the cuts to the public programs that help make our communities safe, healthy, and educated, we must also remember that the remaining cuts were as unnecessary as they are damaging.
• The Legislature could have passed any number of sensible bills that would have increased state revenues by closing tax loopholes and making sure that all taxpayers are paying what they owe under our current tax laws. Instead, they rejected every such proposal presented, including a bill to make sure out-of-state taxpayers pay the taxes they owe when they sell vacation homes in Montana and a bill that would limit the use of foreign tax shelters by multi-national corporations.
• Instead, they chose to give $16 million away in the form of a business equipment tax cut, with the largest benefits going to multinational corporations like Exxon Mobile and Conoco Phillips. THERE’S STILL TIME TO CALL THE GOVERNOR (444-3111) AND ASK HIM TO VETO SB372.
• The Legislature also refused to acknowledge and budget for an extra $27 million that their nonpartisan legislative staff anticipate will be coming into the state over the next two years.