Wars Between the States

Taxes on energy resources pit the haves against the have-nots

"We have on our hands the making of a civil war, being fought with taxes instead of muskets. And this time, the North (including the Midwest) is going to lose."

That fear, voiced by J.R. Prestidge of the Northeast-Midwest Institute, a research center in Washington, B.C., is shared by state officials throughout the industrial Frostbelt. The source of their concern: severance taxes, duties imposed by a state on its exports to other states of oil, natural gas, coal or other nonrenewable resources. The flow of these tax revenues from energy consumers to energy producers is creating antagonisms between the states much like those among nations. "The coal states have the power to become our OPEC within," says Washington Economist Sally Hunt Streiter. Complains New York Taxation and Finance Commissioner James Tully: "They are the fuel pharaohs of the Western world."

Severance taxes are nothing new. Michigan began collecting 4% on the gross value of its mineral exports in 1846, and 33 other states now impose such levies. But as fuel prices have soared, energy-rich states have increased their tariffs. Alaska, for instance, raised its oil tax from 12% to 15% last June. That was reasonable compared with Montana and Wyoming, which are exacting 30% and 17%, respectively, on coal exports. All told, coal, gas and oil severance-tax collections have ballooned from $2.1 billion in 1977 to $4 billion last year. Says Governor Brendan Byrne of New Jersey: "It is potentially the largest transfer of wealth in the history of this country."

States on the receiving end say they need the money to cover the environmental and social costs of extracting natural resources. They point to the new roads, schools and sewer systems needed by burgeoning energy towns, and to the sad example of those Appalachian states that remained impoverished while shipping their coal elsewhere. Severance taxes, says Montana Governor Ted Schwinden, help prevent "the mistakes of the past, cover the costs of today, and leave us something when all the coal is gone."

States on the paying end do not quarrel with this concept, just its exorbitant execution. "These taxes no longer relate to the depletion of a state's resources,'' says Richard McClure, an aide to Illinois Governor Jim Thompson. "Energy-rich states are now exporting their tax burdens around the country." A study by the Commerce Department shows that nine states depend heavily on severance-tax income to run their governments. In Louisiana, 23% of the 1978 state budget came from these taxes; in Wyoming, 22%; in Alaska and New Mexico, 19%; and in Texas, 17%.

With severance-tax revenues pouring into their coffers, these states are in a position to keep other taxes relatively low. Texas and Wyoming, for example, have no personal or corporate income taxes. Says Frank Beal, director of Illinois' Institute of Natural Resources: "They are at an enormous advantage in attracting industry." Energy-importing states, meanwhile, have to raise taxes to pay for severance outlays. Says Beal: "That forces industry to states with lower taxes."

To defend themselves, some energy-importing states propose retaliating in kind. Iowa is considering a severance tax on its corn and soybean exports. "Our soil is as much a nonrenewable resource as coal," explains Doug Gross, an aide to Iowa Governor Robert Ray. Maine may tax copper and zinc. Says Byrne: "Perhaps the Northeast can place a severance tax on Ivy League educations."

There is an alternative to regional "tax warfare." Though the Supreme Court ruled last month that Montana's 30% severance tax did not impose an unconstitutional restriction on interstate commerce, it left the door open for Congress to step in and put a cap on such levies.

Legislation that would limit coal taxes to 12.5% has been introduced in both houses. The fuel states, of course, will fight it.

"The important issue," says Montana's Schwinden, is "the right of the people in a state to set their own taxing policy."

Whether that right allows one state to impoverish another promises to be an important issue for Congress and the Reagan Administration--and perhaps the most important test for the Union since the Civil War.

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