MINERAL TAX INCENTIVES, MINERAL
PRODUCTION AND THE WYOMING ECONOMY
Shelby Gerking*
William Morgan
Mitch Kunce
Joe Kerkvliet

December 1, 2000

*University of Wyoming email contact: sgerking@uwyo.edu

 EXECUTIVE SUMMARY
The minerals industry accounts for a substantial share of tax revenues to the State
and to local governments in Wyoming. In FY98, taxes directly paid by the minerals
industry totaled $542 million and represented about 42% of State and local tax collections
(Tax Reform 2000 Committee 1999). These revenues were obtained primarily from
severance and property taxes levied against the value of production of oil, natural gas,
coal, trona, uranium, and other minerals. Periodically, since 1983, the Wyoming
Legislature has granted tax incentives (see Appendix A) to the minerals industries for the
purpose of stimulating production, tax collections, and job creation across the State.
Wyoming is not unusual in this regard: Other mineral producing states also grant a myriad
of tax exemptions and incentives (usually discounts against existing tax liabilities) for
special situations faced by operators. In 1999, the Wyoming Legislature appropriated
funds for an econometric study of the effects of mineral tax incentives granted under
current law (1999 Wyoming Session Laws, Chapter 168, Section 3). This report
summarizes results of this study for the oil, gas, and coal industries.
By statute, and by agreement with the Legislative Subcommittee overseeing this
project, this report must address two questions. First, to what extent do mineral taxes, tax
incentives and environmental regulations increase or decrease tax collections to Wyoming
entities as compared with amounts that would be collected in their absence? Second, to
what extent do taxes, tax incentives and environmental regulations alter employment and
other economic activity in Wyoming as compared with what would occur in their
absence? These questions are interpreted broadly; for example, the term “Wyoming
entities” refers to state government, political subdivisions (such as cities, towns, counties,

I

 and school districts), and other special districts. Employment and other economic activity
in Wyoming refers to all sectors of the State’s economy, not just those closely related to
mineral extraction. Finally, and perhaps most importantly, the study not only evaluates
existing incentives and regulations, it also develops a framework that can be used to
support future decision-making on State tax policy.
Chapter 2 presents background by looking at the economic effects of all major
types of taxes and royalties levied on the oil and gas industry by federal, state, and local
governments in the United States. This background is important for three reasons. First,
it provides the perspective needed to evaluate the incidence or ultimate burden of an
increase in taxes or elimination of tax incentives. In the case of Wyoming oil and gas,
taxes are shifted backward entirely to operators and resource owners. Wyoming oil and
gas production represents only a tiny fraction of the world market for petroleum products
and, therefore, producers in Wyoming are price-takers, not price-makers. Second, the
review introduces the concept of an effective tax rate. Effective tax rates are particularly
useful in accounting for effects of tax incentives, such as those that have been granted to
oil and gas producers in Wyoming. For example, an effective severance tax rate on
Wyoming oil production can be computed by dividing total oil severance tax payments by
the value of oil production. Because this calculation focuses on actual tax payments, it
fully accounts for all applicable tax incentives. All of the analyses presented in this report
are based on effective rates of taxation so that tax incentives can be appropriately
modeled.
Third, the review underscores the fact that different types of taxes have different
economic effects. Important taxes levied on the oil and gas industry can be grouped into

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 three broad categories; production (severance and ad valorem), property and income.
Production taxes are levied on the value (or volume) of the oil and gas as it is extracted
from the ground or at the point of first sale. This type of tax is seen by producers as an
increase in production costs and tends to lower output by causing marginal wells to be
shut-in at earlier dates than they would be in the absence of the tax. Conversely, a change
in a property tax rate levied on reserves in the ground, or equipment, tends to increase the
rate of current production as producers have an incentive to “mine out from under the
tax.” Finally, a state or federal corporation income tax levied on the accounting profits of
the oil and gas firm (the difference between total revenue and total costs) would be
predicted to have no effect on current production. The objective of the firm is to
maximize profits, and therefore, a tax on net revenue should not alter the rate of output.
Reliance on these three types of taxes differs substantially between the eight states
responsible for about 73% of U.S. oil and 83% of U.S. gas production (Alaska, California,
Kansas, Louisiana, New Mexico, Oklahoma, Texas, and Wyoming). All states except
California levy production taxes against the gross value of output. Most states do not levy
property taxes on the value of reserves in the ground (Texas and California do). Most
states treat royalty payments (computed as a percentage of gross value of production) for
production on public land as deductible items in computing severance tax liabilities
(Louisiana and Kansas do not). Most states levy a corporate income tax on income that
applies to oil and gas operators (Wyoming and Texas do not). Louisiana permits federal
corporate income tax payments to be deducted against its state corporate income tax
liabilities, but this feature is not currently available in the other five states that levy state
corporate income taxes. All states define tax bases differently and levy taxes at different

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 rates. Within states, counties apply their own mill levies to compute property taxes on
above-ground and down-hole equipment at different rates. Tables 2.1 and 2.2 summarize
differences in tax rates in selected years for the eight major oil and gas producing states.
These comparisons use effective tax rates in order to account for differences in tax
incentives between states. This report primarily analyzes changes in production taxes and
production tax incentives. Wyoming relies heavily on production taxes at the state and
local level to support public services. Also, tax incentives for oil and gas producers (see
Appendix A) are discounts from production (severance) tax liabilities.
Chapter 3 develops an empirical framework that can be used to show how changes
in taxes, tax incentives, and environmental regulations alter the timing of exploration and
production by firms in the oil and gas industry in Wyoming and in other states. This
framework embeds econometric estimates into Pindyck’s (1978) widely cited dynamic
model of exhaustible resource supply. The model is estimated using published data on
drilling, production, reserves, and costs from industry sources including the American
Petroleum Institute and from government sources including the U.S. Department of
Energy. Federal, state, and local effective tax rates also are built into the model. Federal
tax data also were obtained from published sources; however, state and local oil and gas
tax data were mostly obtained from state government sources.
The model has seven advantages. First, it can be applied to any of 21 U.S. states
(including Wyoming) that produce significant quantities of oil and gas. Second, the
model can be used to assess the impact on drilling and production of a change in any tax
or tax incentive that currently exists in any of these states. Third, the model accounts for
interactions between taxes and tax incentives levied or offered by federal, state, or local

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 governments. Fourth, the model can be used to compute the effects on drilling and
production of any environmental regulation that affects oil and gas operations and
interactions between regulations, taxes, and tax incentives are fully accounted for. Fifth,
the model is based on a widely accepted theoretical framework that links exploration to
development to extraction. Sixth, the model accounts for differences in the quality of oil
and gas produced between states as well as differences in transportation costs by adjusting
the wellhead price to reflect these aspects. Seventh, the model runs in Microsoft Excel
and is therefore quite simple to use. For these reasons, the model is arguably superior to
and more comprehensive than previous efforts to develop econometric and/or simulation
models of taxation and regulation of natural resource exploration and production.
The model also has three limitations that ought to be recognized. First, data used
to implement the model certainly are not perfect. Data on oil and gas extraction costs are
particularly weak. However, the best quality public data available have been used to
develop the model. Second, the model does not envision interactions between states that
arise from changes in tax or regulatory policy. In other words, the model shows that a tax
incentive offered in Wyoming may increase oil and gas drilling and production there, but
does not indicate the source of these additional investment dollars. Correspondingly, the
model shows that a tax incentive offered in, say, Oklahoma might affect exploration and
production there, but does not allow for the fact that a portion of the effect might spill
over into Wyoming. Simplifications must be made in the development of any model and
these particular simplifications are made for two reasons. (1) Accounting for interstate
effects would result in only minor changes in results presented. (2) A fully interactive
analysis of oil and gas activity in different states would be quite complex and more

V

 difficult to develop. Third, the model does not account for deviations from a strict dollars
and cents, profit-maximizing point of view of investment decisions. Business decisions in
certain situations may have broader motivations than pure profit maximization; yet, profit
maximization is probably the best single rule that can be used to predict how these
decisions will be made. None of these limitations, however, are serious enough to
invalidate the general conclusions presented in the report.
Chapter 4 uses the model to simulate the effects of changes in tax policy in
Wyoming and in five additional oil and gas producing states. Effects of tax changes in
Wyoming are heavily emphasized in the discussion, and results are reported for other
states mainly for purposes of comparison. Four of these tax change scenarios deal with
actual Wyoming production tax incentives and results are shown in Table ES.1. All of
these scenarios assume that oil and gas prices will be maintained at current levels in real
terms in perpetuity. Chapter 4 considers other possible future price trajectories, but these
alterations have little or no effect on the results presented below.
One scenario considered envisions a once-and-for-all 2 percentage-point reduction
in the state severance tax on Wyoming oil production. According to the model, this tax
change results in only a small stimulus to production and drilling. Output of oil and gas
would rise by a total of 50 million barrels of oil equivalent (BOE) (0.7%) over the next 60
years as compared with a base case in which taxes do not change. Regarding drilling, the
effect of the tax change is somewhat greater. Over the 60-year life of the program, the tax
cut contemplated would result in additional drilling of 1119 wells. This figure represents a
2.3% increase in total wells drilled as compared to the base case in which taxes do not
change. This scenario would reduce the present value (at a 4% discount rate) of oil

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 severance tax collections by 17% over the 60-year time considered, but would result in
increased sales tax collections by about 2.3% because of the increase in drilling. A variant
of this scenario also is considered in Chapter 4 that envisions a 2 percentage-point
severance tax reduction on oil for one year and an elimination of this tax incentive after
that time. This tax incentive results in a tiny increase in drilling activity over 60 years (13
wells) and virtually no change in production activity.
In a second scenario, the severance tax is reduced in perpetuity on all new oil and
natural gas production by 4 percentage points. This tax incentive results in an increase in
drilling by 5.6% and a 1.7% increase in natural gas output over a 60-year time horizon.
However, this incentive results in a loss in present value (again using a 4% discount
factor) of severance tax revenue of about 43%. This large reduction in severance tax
revenue occurs because as time goes by, new production accounts for an increasing
percentage of total production. Again, severance tax losses are partially offset by
increased sales tax collections (due to increased drilling), but the overall story is one of a
substantial net loss in tax revenue. Table ES.1 also shows results of additional
simulations for a perpetual 2 percentage-point reduction in the severance tax on tertiary
production and a perpetual 4 percentage-point severance tax reduction on well workovers
and recompletions. As shown in the table, production, drilling, and tax consequences of
these two incentives are smaller than for the previous incentives considered.
A key question regarding these simulation results is: Why is the response of oil
and gas output so small when production taxes are changed or tax incentives are applied?
There are four reasons why this is so. First, a reduction in production taxes (or an increase
in tax incentives) offers no direct stimulus for exploration. This point is discussed more

VII

 fully below. Second, production taxes and tax incentives are deductible against federal
corporate income tax liabilities. Thus, when production tax rates fall (or production tax
incentives are increased) federal corporate income tax liabilities rise and vice-versa. In
fact, taxes or tax incentives should not be analyzed independently without reference to the
entire tax structure applied by all levels of government; for example, a tax incentive
granted at one level may be partially offset by increased liabilities at another level.
Therefore, operators do not receive the full value of tax incentives that may be granted by
Wyoming and other states. Third, and in a related vein, a reduction in production tax rates
by, say, 2 percentage points has only a small impact on the net-of-tax price received by
operators. For example, suppose that the wellhead price of oil is $25/bbl. and that the
Wyoming oil severance tax rate declines by 2 percentage points. Based on tax data
reported in Chapter 4, this tax reduction would increase the net-of-tax wellhead price seen
by operators from $17.52 to $17.92, an increase of only $0.40/bbl. after all federal, state,
and local taxes, tax incentives, and royalties are accounted for. Such a small increase in
the net-of-tax price per barrel of oil is unlikely to have much impact on production.
Fourth, and most importantly, production of (as contrasted with exploration for) oil
and gas is driven mainly by reserves, not by prices, production tax rates, or production tax
incentives. This is a basic fact of geology and petroleum engineering and is easily
illustrated by Wyoming’s own history of oil production. For example, since 1970,
Wyoming oil reserves steadily declined from 1 billion barrels to 627 million barrels in
1997. In other words, despite much exploration over the past 30 years, production has
drawn down reserves faster than new discoveries have added to them, a trend that is likely
to continue in the future. Also, during the past 30 years, oil production declined from 160

VIII

 million barrels in 1970 to 70 million barrels in 1997. In fact, oil production continued to
decline during the late 1970s and early 1980s even though oil prices rose by a factor of
more than 10, from about $3/bbl. to more than $30/bbl.! Thus, even comparatively large
price increases or tax reductions are not expected to call forth much additional output.
Another type of incentive that could be designed might be aimed at reducing
drilling cost. For example, consider a hypothetical incentive that would reduce drilling
cost by 5%. An example of such an incentive might involve state support for an applied
research program leading to technological advance in exploration methods. If drilling
costs were reduced by 5%, total wells drilled would rise by 9.3% and production would
rise by 2.6% over the assumed 60-year life of the program. Notice that increasing
incentives to explore for oil and develop oil reserves directly stimulate drilling through
which new reserves can be identified. Increases in drilling activity, in turn, lead to
production increases because production is largely driven by reserves. In general,
“upstream” incentives given at the beginning of the exploration-development-production
process provide a greater stimulus to production than “downstream” incentives given at
the end of the process. Whereas an incentive for drilling directly stimulates that activity, a
discount from the severance tax does nothing to directly stimulate drilling—operators get
the benefit of this tax incentive only if they drill and only if they are successful.
The contrast between a tax incentive for drilling and a discount from the severance
tax can be illustrated by considering changes in production tax collections resulting from
each. As shown in Table ES.1, a once-and-for-all 2 percentage-point reduction in state oil
severance taxes, assuming a 4 percent discount rate, results in a decline in the present
value of Wyoming state severance tax collections by $562 million (from $3242 million to

IX

 $2680 million), a decline of over 17 percent. On the other hand, a tax incentive resulting
in a 5% reduction in drilling costs results in additional severance tax collections of $58
million. Also, local ad valorem taxes would rise because of the incentive on drilling by
$68 million because of the associated increase in output. Of course, a tax incentive for
drilling would have to be paid for and if the state simply subsidized the cost of drilling
each new well by 5% over the next 60 years, the present value of the resulting subsidy
would be $616 million. This figure far exceeds the additional severance and ad valorem
taxes that would be collected. However, if the “incentive” was designed to directly
support for an applied research program, the return in production tax revenue may exceed
the cost of the program. Of course, not all applied research programs are effective and
this report takes no position regarding whether such a program should be initiated.
Nevertheless, this type of program at least offers the prospect of leveraging the state’s
resources to provide program support, whereas, discounts from the severance tax hold out
no such possibility.
As previously mentioned, it is important to recognize that changes in severance tax
payments by oil and gas producers alter tax liabilities at the federal level because
severance taxes are deductible in computing federal corporate income tax liabilities. If
producers face a marginal federal corporate income tax rate of 35%, then a $1 reduction in
severance tax payments results in a $0.35 increase in federal corporate income tax
liabilities. Thus, a decline in state severance tax collections $562 million (as was the case
with a permanent 2 percentage point reduction in the severance tax on oil) results in an
increase in federal tax collections of about $197 million, holding everything else constant.
A key conclusion here is that reduced severance tax rates shift public funds from the state

X

 to the federal government. Of course, when Wyoming is able to choose a tax incentive
that increases tax collections, the transfer of public funds goes on the opposite direction,
from the federal government to the State of Wyoming. Additionally, any production
stimulus obtained from a tax incentive granted at the state level benefits local
governments as ad valorem taxes rise.
Chapter 5 shows how oil and gas exploration and production decisions have been
altered due to differences in stringency of application of environmental and land use
policies on private and federal property. An important part of the analysis is a cost
function estimated from 1390 wells drilled in the Wyoming Checkerboard over the period
1987-98. Estimates presented suggest that environmental and land use policies result in
drilling costs that are at least 10% higher on federal property, thus retarding current
development of oil and gas resources there as compared with costs that might be expected
on private property. Implications of this result for future exploration and extraction of oil
and gas then are developed by inserting these estimates into the model developed in
Chapter 3. An advantage of this approach is that it accounts for the extent to which
increased costs arising from regulation are deductible against tax liabilities faced by the
industry.
The resulting model then is simulated to obtain effects of more stringent
application of environmental regulations prevailing on federal property. Similar to the
simulations for tax changes presented in Chapter 4, attention is directed to exploration and
production. Two states are considered, Wyoming and New Mexico. These states were
chosen because a comparatively large percentage of their oil and gas reserves are beneath
federal property. The simulations show that environmental regulations have the effect of

XI

 retarding exploration and production and shifting drilling to the future. Thus, a more
stringent application of environmental regulations on federal land promotes removing
only the best quality reserves and leaves more oil and gas in the ground at the end of the
extraction program. Because environmental and land use regulations apply largely to
drilling activity, they have sizeable effects on future drilling and production. In fact,
reducing stringency of environmental and land use regulations would have similar effects
to an improvement in technology that applies to drilling. Reducing stringency of
application of environmental and land use regulations on federal property in Wyoming to
the level of that found on private property would increase state and local production tax
collections by 3.5% over the next 60 years.
Chapter 6 provides an overview of effects of changes in taxes and environmental
regulations on the Wyoming coal industry. General industry trends considered include the
rapid rate of industry growth, generally falling mine-mouth prices since the mid 1980s, the
shift away from sales of coal on long-term contracts and towards sales in the spot market
instead, and the penetration of new and more distant markets. Transportation issues also
are discussed and focus here is on the behavior of railroads in the 1980s and 1990s after
passage of the Staggers Act largely freed them from price regulation. Coal producing
areas of Wyoming currently are served by at most two railroads; in consequence, an
important issue concerns the possibility that lack of competition has led railroads serving
Wyoming to hold considerable market power over both mines and utilities. Data from the
Energy Information Administration (USDOE) indicates that coal transportation rates
declined and typical shipment distances increased over the period 1980-93, yet the
possibility of non-competitive freight rates for coal remains a possibility. This chapter

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 also provides a brief discussion of the 1990 Clean Air Act amendments pertaining to coalfired power plants, as well as an explanation of state and local taxation of this industry in
Wyoming.
Chapter 7 builds on the descriptive information presented in Chapter 6 and
develops a conceptual model showing how Wyoming’s production of coal is affected by a
change in production tax rates and by the imposition of a ton/mile tax on coal tonnage
hauled by railroads. The model focuses on interrelationships between three important
agents in the market for coal, mines, railroads, and electric utilities. Mines, of course, are
the suppliers of coal and utilities are the main end users who use coal as an input in the
generation of electricity. Railroads, which provide transportation of coal, are included in
the model because freight costs may represent as much as 80% of delivered coal prices.
Key aspects of the model are that coal mining is treated as a competitive industry, and
railroads are assumed to exercise market power in setting transportation rates faced by
utilities. This characterization may seem surprising because the exercise of market power
by all players in the coal market has been a dominant theme in previous research; yet
numerous changes in the industry in recent years (outlined in both Chapters 6 and 7)
suggest that the framework adopted here captures the main features of the problem to be
analyzed.
The conceptual model then is implemented by inserting empirical estimates of key
parameters. These estimates are obtained using two confidential data sets, one on costs of
surface coal mining in the Powder River Basin and the other on costs of hauling coal from
various points in Wyoming to 244 electric power generation plants. Also, estimates of
demand for Wyoming coal, obtained from publicly available data from the Federal Energy

XIII

 Regulatory Commission, allow the economic market area for Wyoming coal to change
with changes in the delivered price. For example, these estimates allow for an expansion
of the “economic reach” of Wyoming coal as delivered prices fall. Using these estimates
jointly with the conceptual model developed, numerical predictions are provided of effects
of two tax changes, a 2 percentage-point reduction in the coal severance tax and the
imposition of a $0.0001 per ton/mile tax on railroads hauling coal.
The effect of reducing the Wyoming severance tax by 2-percentage points from
7% to 5% of the value of coal produced causes output of coal to rise by 1.42 MMST
(0.47%) and causes the mine-mouth price of coal to fall by about $0.12. Also, the average
delivered price of coal falls by about $.02, so that the freight rate per ton of coal hauled
along a route of average length rises by about $0.10 or 0.77%. Thus, the tax reduction has
the effect of reducing mine-mouth prices seen by the coal industry, but the market power
of railroads to set freight rates means that delivered prices seen by utilities change little.
As a result, the increase in quantity of coal demanded by utilities is relatively small. On
the other hand, the tax rate reduction would drive down coal severance tax collections by
about 27%. The general conclusion, therefore, is that a 2 percentage-point coal severance
tax rate reduction would result in a comparatively small increase in coal production and a
comparatively large reduction in coal severance tax collections.
Also, the $0.0001 per ton/mile tax on railroads hauling coal leads to a 0.30 MMST
reduction in the quantity of coal produced, a percentage decline of about 0.10%, while the
mine-mouth price coal, its the delivered price, and the railroad freight rate are left
virtually unchanged. The very low rate of tax explains why these effects are so small.
However, higher ton/mile tax rates would lead to greater reductions in coal output and,

XIV

 perhaps more importantly, would lead to reductions in mine-mouth coal prices and
increases in the delivered price of coal to utilities. Thus, railroad freight rates rise because
their market power over both mines and utilities enables them to drive a deeper wedge
between mine-mouth prices of coal and delivered prices of coal seen by utilities. In any
case, an approximation to the total revenue to be collected from this tax (as adopted by the
Wyoming Legislature) can be calculated by applying the effective rate of tax per ton to the
quantity of coal produced in 1998. This calculation yields a value of total tax collection of
$7.63 million. (Note that this figure is a bit too high because some Wyoming coal is
burned in mine-mouth, coal-fired electric power plants and a small percentage is trucked
out of state.) However, because imposition of this tax will cause (small) reductions in
coal production and mine-mouth prices, severance tax collections (in millions of dollars)
will fall by about $0.136 million. So, net of the decline in severance tax revenue,
imposition of the ton-mile tax on railroads would produce an additional $7.49 million in
tax collections.
Current environmental issues facing the coal industry are treated in Chapter 8.
The acid rain program created by Title IV of the Clean Air Act Amendments (CAAA) of
1990 introduces a sulfur dioxide (SO2) emissions permit market for the electric utility
sector. In Phase I (1995-99), EPA began controlling aggregate annual emissions from the
263 dirtiest generating units in the US by issuing a fixed number of SO2 emissions
permits. For every ton of SO2 it emits annually, a plant must surrender an emissions
permit to the EPA. Each plant is provided an annual endowment of permits, at no charge,
based on 2.5 pounds of SO2 per MMBTU’s burned during a base period in the 1980’s.
Over time, the number of permits issued by the EPA will decline. Moreover, in Phase II

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 (2000 and beyond), virtually all existing and new fossil-fueled electric generating units in
the US become subject to similar, but tighter, SO2 regulation. In Phase II, plants will be
issued smaller annual permit endowments, based on 1.2 pounds of SO2/MMBTU.
The 1990 CAAA presents both opportunity and challenge for the Wyoming coal
industry. As the overall emissions of SO2 are progressively restricted, Wyoming low
sulfur coal is likely to be favored. However, increasing use of Wyoming coal is not
certain for three reasons. First, compared to prior SO2 regulation, CAAA 1990 provides
utilities with additional options in responding to SO2 emissions regulation, most notably
switching to lower sulfur coal from other regions, installing fuel gas desulfurization
equipment, and reallocating SO2 emissions over time. Depending on the relative costs of
these options, plants may or may not decide to purchase more Wyoming coal in any given
year. Second, besides Wyoming there are other important sources of low sulfur coal,
including Colorado, Utah, and the central Appalachian region. For many plants,
especially those distant from Wyoming, these other coals may have a price advantage.
Several authors have suggested that greater SO2 emissions reductions by Phase I plants
have resulted from the use of lower sulfur coal from other regions than from the use of
Powder river Basin coal. Third, even if Wyoming coal can be delivered to a plant at a
lower price than low sulfur coal from other regions, the plant may encounter substantial
costs in retrofitting their boilers and coal processing facilities to accommodate the use of
Wyoming coal.
This chapter implements an empirical model of power plants’ choices about SO2
emissions, permit trading, and permit savings as well as their fuel choices. Holding power
generation constant, there are three basic ways to comply with SO2 regulations: (1) The

XVI

 plant may engage in fuel switching by purchasing coal lower in sulfur, blending high and
low sulfur coal, or cofiring with natural gas. (2) The plant may obtain additional permits
from other plants owned by the same utility, or purchase permits on the open market or at
EPA auctions. (3) The plant may install flue gas desulfurization equipment or retrofit
existing equipment. The model allows for each of these possibilities and finds that in
Phase II, Wyoming coal production may experience a 6.2% increase in output in current
Phase I plants. Extending this prediction to all Phase II plants suggests that the demand
for Wyoming coal will increase by about 7 –10%.
In Chapter 9, the 172-sector version of a model for Wyoming furnished by
Regional Economic Models, Inc. (REMI) is used to estimate statewide economic effects
of several tax incentives (see Table 9.2). For example, focusing first on a permanent 2
percentage-point severance tax cut on oil production, total employment in 2000 would rise
by 313 persons and this employment increase steadily declines until 2035, when the tax
reduction means that 123 additional persons would be employed. Income effects of the
tax reduction are also are quite small. Real personal disposable income (in $1997) would
be about $8 million larger in 2000 and about $5.8 million larger in 2035. Thus, in 2000,
real personal disposable income per employee added to the state’s economy would be
$25,559 ($8 million/313) and the corresponding value for 2035 would be $47,154 ($5.8
million/123). This last calculation is of interest as it shows how the model accounts for
expected real wage and salary increases due to productivity changes and related factors
over the next 35 years. The model suggests that as employment and real incomes rise,
Wyoming’s population will rise as well. In 2000, the population increase resulting from
the tax change would be 246 persons. By 2010, the Wyoming population would be 380

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 persons larger than without the severance tax reduction. These estimates reflect the fact
that the effects of the tax change on population do not all occur in one year and instead
accumulate over time as people’s decisions to move into the state often require more than
a year to be implemented. However, by the year 2035, the state population increase
associated with the tax change is only 178 persons.
As a second example, a permanent 2 percentage-point reduction in the severance
tax on coal would increase total employment in 2000 by 61 jobs, and contribute a total of
about $2.5 million to the state’s economy. Population would increase by about 70
persons. So, overall, the economic benefits to Wyoming’s economy as a whole from a
coal severance tax cut of this magnitude would be quite small. Other estimates from the
REMI model show effects on employment, personal income, and population from the
remaining tax changes and tax incentives considered in this report (see Table 9.2).
The overall story of the distinct, yet moderate economic effects should be
expected for two reasons. First, the drilling incentive directly impacts exploration and the
prospect of adding reserves, thus the more prominent effect. Second, the oil, gas and coal
industries are not labor intensive. For example, based on data from the REMI model, the
ratio of the change in output from the oil and gas production and field services sectors to
the employment change in those two sectors is about $220,000. On the other hand, the
increase in wage and salary distribution in the oil and gas and field services sectors,
relative to the employment change there, is only about $27,000. Thus, at the margin each
employee in those two sectors is associated with additional output valued at $220,000, but
receives only $27,000, so labor’s share of the additional output is a little more than 12%.
Returns to owners of other factors of production such as capital and the reserves

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 themselves account for the remaining 88%. Whereas workers employed in the Wyoming
oil and gas industry are likely to live in the state, capital and reserve owners can live
anywhere and therefore may not spend their increased incomes in Wyoming. As a result,
changes in oil and gas activity do not benefit the Wyoming economy as much as they
would if labor intensity were higher. Corresponding calculations for the coal industry
yield similar conclusions. Therefore, income, employment, and population changes,
resulting from tax incentives directed to the oil, gas, coal industries, are expected to be
moderate as well.

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 Table ES.1

Simulated Tax Incentive Scenarios, Changes from the Base Case
Change in
Total
Production
MMBOE (%)

Change in
Total
Drilling
Wells (%)

Change in PV Change in PV
State Severance
Sales Tax
Tax Collections Collections
$Millions (%) $Millions (%)

1. Reduce Severance Tax on Oil
by 2 % points

50.2 (0.68%) 1119 (2.28%) -562.4 (-17.35%) 12.4 (2.29%)

2. Reduce Severance Tax
on all New Well Production
by 4 % points

122.3 (1.66%) 2768 (5.64%) -1389 (-42.84%) 30.6 (5.65%)

3. Reduce Severance Tax
on Tertiary Production
by 2 % points

5.0 (0.07%)

99 (0.20%)

-55.9 (-1.72%)

1.2 (0.22%)

4. Reduce Severance Tax
on Production resulting
from Workovers and
Recompletions by 4 % points

12.3 (0.17%) 239 (0.49%)

-136.9 (-4.22%)

3.0 (0.51%)

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