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It's called a severance tax because it is intended as a recompense to a state for "severing" a non-renewable resource, mostly petroleum and natural gas, from its territory.
Thus a constitutional requirement that Utah sock away a certain percentage of its severance tax revenue into a permanent fund, replacing one store of wealth with another, has merit. The Utah Legislature, in passing HJR6, has voted to put just such a question before the voters this fall.
But a better idea than squirreling away many millions of severance tax dollars, out of the stream that funds education and other functions, would be to raise the state's puny severance tax rate.
Right now, the tax rate for oil and gas drilled out of the Utah landscape ranges from 3 percent to 5 percent, depending on its current market price. That, plus a 0.2 percent conservation fee, netted the state some $65.6 million in production taxes in its fiscal year 2011. Add in sales and property taxes, and the state's oil and gas extractors ponied up almost $123 million in taxes that year — or about 3.3 percent of the value of the resources extracted. (Figures from the independent analysts at Montana's Headwaters Economics.)
Those are similar amounts paid by the hydrocarbon industry in Colorado. But it's well below the raw numbers, and the percentages of commodity values removed, for the same year in Wyoming and North Dakota.
Which means Utah is leaving a lot of money on the table.
Severance tax rates vary considerably by state and can be hard to compare because they can include exemptions, rebates and other gimmicks designed to reward new wells or to keep marginally producing wells on line. But the base rates in many states are well above those charged in Utah.
North Dakota, which is in the middle of an oil production boom, stacks a 5 percent oil production tax on top of a 6.5 percent oil extraction tax, putting the lie to arguments that high taxes discourage production. A low global price for oil is the only thing that slows down production. And a high global oil price is the only thing that consumers feel in their back pockets.
Our neighbors in Wyoming have as many classifications for oil wells as the Inuit have names for snow, with tax rates ranging from 1.5 percent to 6 percent. But, with the sales and property taxes also paid by these wealth extractors, it all adds up to an effective tax rate of 11.4 percent and an annual state revenue of some $358 million.
That's money that Utah could use, both for ongoing needs and to create a permanent endowment for future needs.