U.S. Energy Plunge Slams State Budgets, Raising Tax Hike Fears

States that collect "significant" severance tax revenues from the oil patch and the coal industry are now scrambling to deal with "revenue shortfalls," the U.S. Dept. of Energy now says, as those sectors are experiencing a decline.

The states getting hit hardest are Alaska, North Dakota, Texas, Oklahoma, West Virginia and Wyoming, since these states get most of their tax revenues from their energy sectors. States assess what are called “severance” taxes on companies that remove nonrenewable resources like crude oil, natural gas, and coal. Depending on the state, those taxes can make up anywhere from 40% to even as high as 75% of a state’s overall tax receipts.

The downturn spells tax hikes, as state officials often spend what they expect to get. In other words, when states allocate budget money for spending, they typically base that spending on economic forecasts. In turn, state lawmakers often spend money that isn’t yet in the door. So when a major area of state tax revenues hits the skids, that spells either spending cuts, or tax hikes to cover the shortfall.

"Lower fossil fuel prices, and in some cases, lower production, have led to lower severance tax receipts than were expected when revenue estimates were developed," report Robert McManmon and Grant Nülle, top researchers at the Energy Information Administration (EIA).

U.S. West Texas Intermediate crude oil prices crossed below the $30 mark on Tuesday, touching $29.93, its lowest level since December 2003. The WTI crude oil spot price has plunged about 72% since its $107 level in June 2014 and is heading towards levels not seen since President Bill Clinton won his first term. Half a dozen Wall Street shops, including Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS) and Citigroup (NYSE:C), project $20 a barrel for oil, with Standard Chartered posting a more bearish call at $10.

About 87,000 U.S. oil workers and support employees lost their jobs last year, says Michael Plante, an economist at the Dallas Federal Reserve. Earnings at the S&P 500 energy companies could drop more than 68% for the fourth quarter of 2015, and overall, they could lose $28.8 billion this year, versus earning more than $95 billion in 2008, says S&P Capital IQ. Corporate bankruptcies loom.

It's a serious development with widespread policy ramifications in this presidential election year. There has been an unforeseen consequence from tougher regulation of the U.S. energy industry. The Administration has hamstrung the U.S energy industry, oil analysts complain, which has also helped slow economic activity there and worsen the tax haul in a growing number of states.

However, President Barack Obama said in his last State of the Union address that investing in clean energy will lead to a stronger economy and employment gains. In the last quarter of 2015, the U.S oil sector pumped out 87% more crude oil than it did in the last quarter of 2008, before President Obama sat down in the Oval Office. But that’s largely due to major advances in drilling technology versus Administration policy.

In its analysis, the EIA only looked at severance tax shortfalls. It didn’t address the potential drop in other state tax collections due to slowing economic activity, like lower sales tax revenues.

Which states could see tax increases because of the energy downturn? Here’s what the EIA found.

Alaska: The “Last Frontier” state could be in the worst shape, as it gets 72% of its state tax revenues from its energy industry. But more so because of the way Alaska assesses its severance tax. “Alaska's severance tax revenue has fallen further and faster than other states because its tax is based on the operators' net income rather than on the value or volume of oil extracted,” the Energy Dept. notes. “In 2015, when average net incomes after operating and capital expenses were near zero, the state derived practically no revenue from this tax, versus more than $5 billion in 2012.” Due to the sharp drop in severance tax revenues, Governor Bill Walker, an independent, recently proposed the first state income tax in 35 years, at a 6% rate, as well as scaling back the dividend payout to state residents from Alaska's Permanent Fund. In fact, Alaska’s fund has earned more money from a $128.5 million bet on a speculative biotech stock, Juno Therapeutics (NASDAQ:JUNO), versus what it collected in oil production taxes, reports Dermot Cole of the Alaska Dispatch News.

Texas: As of November 2015, state tax revenues from oil and natural gas production plummeted 48% and 51%, respectively, versus a year ago, according to the state comptroller of Texas. Overall, severance taxes comprised a lower percentage of Texas’s tax total receipts (11% in 2014). That means Texans may not see tax hikes to cover the shortfall—if state legislators can curb spending.

North Dakota: The oil sector in this state has been holding steady. Volumes pumped have stayed pretty much flat throughout 2015 versus the year earlier. But as oil prices sunk, the state’s total severance tax revenues fell 43%, to $2 billion in 2015 from more than $3.5 billion in 2014. That carved money out of the state's tax collections from July through November 2015, with the first five months of the 2015 to 2017 budget period projected to come in at $152 million, 8.9% below forecast. “The below-budget revenue was attributed to weaker sales tax collections, which are in part driven by oil exploration and production in the Bakken region,” McManmom and Nulle note. “If projected revenue remains 97.5% or less of the budgeted amount, across-the-board spending reductions would be imposed for most state agencies.” Or tax hikes loom.

Wyoming: Wyoming gets about 39% of its overall tax revenues from severance taxes on its oil, natural gas, and coal production, along with associated federal mineral royalties. But even though Wyoming ramped up its oil production, the oil price plunge, along with “declining natural gas and coal production,” slammed state revenues, the EIA notes. The state estimated as of last October that it would get $116.4 million from its oil patch from 2015 to 2016. State legislators had to lower its 2015 to 2018 severance tax projections by nearly $160 million from their January 2015 projections. Overall, 2017 to 2018 state tax revenues are expected to sink by 28%, to $2.9 billion, down from $4 billion from 2013 to 2014.

Oklahoma: The Sooner state is seeing tax collections pump dry in other areas besides severance taxes, notably state sales taxes and individual and corporate income taxes, which “are also significantly affected by oil and natural gas prices,” McManmom and Nulle point out. Even though “severance taxes accounted for 8% of Oklahoma's revenue collections in 2014,” they note Oklahoma faces a fiscal year 2017 budget deficit of $900 million on a general fund budget of nearly $7 billion. The situation is so bad that last December, state legislators declared a revenue failure, which forces state agencies to cut spending. If they don’t, the state can still dip into its rainy day fund, called its “budget stabilization fund,” with up to 37.5% of that pot of money on tap.

West Virginia: Nearly one out of every seven bucks the Mountain State collects come from its energy sector. But with its coal production moribund, and natural gas prices sinking, by the third quarter of 2015, West Virginia had its “lowest total tax collection since 2008, mostly as a result of decreased severance tax receipts, helping create a projected fiscal year 2016 budget deficit of more than $250 million,” report McManmon and Nulle. West Virginia's coal production last year was down by a seventh versus 2014. “Lower natural gas prices have more than offset an increase in the state's natural gas production, resulting in lower natural gas severance tax receipts,” the EIA analysts note. “In October 2015, the governor announced 4% reductions to budgets for most state agencies.”