Century-old oil and gas royalty rates shortchanging taxpayers

The current federal onshore royalty rate is 12.5 percent. An analysis of oil-producing western states found that state oil and gas royalties are significantly higher, usually either 16.67 percent or 18.75 percent. Texas – one of the highest producing states in the nation – doubles the federal rate, charging 25 percent to drill on state-owned lands.

Oil and gas found on federal lands belong to the taxpayers, who should be fairly compensated for the extraction of public resources. Updating the federal rate to match state rates would ensure a fair return by closing a gap that costs taxpayers hundreds of millions of dollars each year.

The oil and gas industry is a mature industry that has active leases on almost 38 million acres of federal lands. There is no reason to continue the unfair taxpayer-funded subsidy the federal royalty rate has become at a time when the federal government is struggling to balance its budget without raising taxes or cutting important services.

Oil producing states would also benefit directly from updated federal royalties. Under current law, states receive an even share of federal royalties from oil produced within their boundaries. States have their own budget problems and are dealing with the strains that industrial drilling operations place on infrastructure and services – problems that could be addressed using increased revenue from updated royalties.

According to President Obama’s FY 2013 budget, updating royalties, along with other common-sense oil and gas reforms, would generate $2.5 billion in net revenue for the U.S. Treasury over the next decade.

At the state level, the numbers are also significant.  An analysis by the Denver-based Center for Western Priorities found that matching the federal rate to either of the common state rates would have generated between $400 million and $600 million in additional revenue, respectively, in 2012. The low federal rate cost New Mexico and Wyoming each more than $150 million in additional funds. Moving across the West, the outdated federal rate cost Colorado more than $36 million, Utah $44 million, and Montana over $5.5 million.

The good news is that whatever corrective action is taken on royalties, evidence indicates it will not significantly slow drilling. A comparative analysis by the research organization Headwaters Economics shows that states with higher rates are not at a competitive disadvantage to those with a lower rate. Wyoming has the highest effective rate in the West and is also a leader in production.

Of course, there have been other “good ideas” for helping to balance the budget that end up stuck in Washington gridlock. But royalties are different. While Congress can and should update onshore royalty rates, it is within the power of the Interior Department to set a rate that ensures taxpayers a fair return. In fact, under the Bush Administration, Interior Secretary Dirk Kempthorne raised the offshore oil and gas royalty rates to 18.75 percent without fuss.

More recently, Interior Secretary Ken Salazar suggested updating the onshore rates and President Obama’s 2013 budget recommends addressing the royalty issue. The idea has been floated; now it’s time for action.
 
Baca recently retired as the State of New Mexico's Natural Resource Trustee. He served as the director of the National Bureau of Land Management, Department of the Interior in the first Clinton Administration, as mayor of the City of Albuquerque, and two prior terms as New Mexico’s elected State Land Commissioner. He also serves on the Boards of numerous non-profit organizations including The Wilderness Society and the Wyss Foundation and the Southern Utah Wilderness Alliance.