While extractive industries made up 1.4% of the U.S. GDP in 2016, they play a much larger role in some local communities. For example, extractive industries made up 20.3% of Wyoming’s GDP in 2016. At the county level, certain communities may be even more economically dependent on extractive industries.
Local governments and communities must consider the many ways natural resource management and extraction can affect their fiscal health. One of the most significant considerations is the sustainability of revenues local governments receive due to natural resource extraction. Revenue sustainability is a critical factor in making natural resource wealth “an engine for sustainable economic growth.”1 However, when it comes to managing this critical factor, there are two challenges localities need to address:
- The sustainability of revenue over time, given that revenue fluctuates with commodity prices, and fossil fuels and hardrock mineral deposits are finite or may not be economically extractable based on current technology.
- The net sustainability of revenue given the fiscal benefits of increased revenue from extractive activities and the fiscal costs of increased government expenditures necessary to support extractive activities.
These revenue sustainability considerations are magnified at the local level. A significant influx or loss of natural resource revenue can have a material impact, positive or negative, on the quality and variety of services that a local government can provide its residents. To achieve sustainable economic prosperity, local governments must consider how they can best use natural resource revenue to promote long-term growth and investment in their communities, and how to ensure that the financial benefits of extraction outweigh the costs in the short- and long-term.
At the county level, revenue received from extractive activities takes many forms. For example, some payments originate from taxes on land ownership, while others are based on ownership of the natural resource itself. There are also different methods of valuation ranging from payments at the point-of-sale, to annual taxes, to those based on an estimated value of the natural resource. The four most common types of revenue examined include: property taxes, sales and use taxes, state transfer payments, and additional production taxes.
- Property taxes: Taxes paid by owners of oil and gas or mineral properties to the county government based on the value of the property.
- Sales and use taxes: Though not a direct result of natural resource extraction, revenue from sales and use taxes can rise dramatically during resource extraction booms when population and economic activity increase.
- State transfer payments: Revenue transferred to the county by the state, from sources such as severance taxes (paid by extractive industries to the state based on the volume or value of the resources extracted) and lease payments (such as bonuses, rents, and royalties, paid by extractive industries to a public land and mineral owner, which might be the federal government or the state).
- County production taxes: Severance taxes or other payments paid by extractive industries to the county based on the volume or value of resources extracted, or per lease terms if the county is the landowner.
Local governments often make financial investments in their communities to support extractive industries. Costs vary based on the size of the community, the state of its current infrastructure, and the type of natural resources extracted. In some circumstances, these costs are outweighed by the influx of revenue, while in other cases costs can result in net negative fiscal effects on local governments.2 Given these possibilities and considerations, these case studies focus on four types of fiscal costs at the local level:
- Transportation: The cost of constructing new transportation infrastructure (such as roads or trains) or repairing current infrastructure due to heavy industry use.
- Water: The cost of constructing new water or sewer infrastructure (such as water pipelines or treatment plants) to meet the needs of extractive industries, upgrading current infrastructure, or treating additional wastewater from extractive activities in the public wastewater treatment system.
- Reclamation: The cost of returning mines or oil and gas lands to their state prior to disturbance, including physical site stability, ecosystem functions, and long-term site monitoring. (Today’s companies are legally responsible for current reclamation costs and pay Surface Mining Control and Reclamation Act fees towards historic abandoned mines.)
- Emergency services: The cost of new emergency services (such as firehouses, ambulances, or chemical spill equipment) needed to support extractive industries and protect the public from possible health and safety hazards.
There are additional fiscal benefits and burdens associated with extractive activities beyond those addressed here. For example, a local government may receive in-kind revenue from extractive industries, such as payment for a new public road that company employees will use to access work sites. Another fiscal cost might be additional government staff for managing public services that support extractive activities. While all are worthy of careful consideration by local communities and governments, these case studies focus on the revenue and costs defined above.
We used a range of information publicly available online to compile the case studies, including government databases, documents, and reports, as well as information produced by councils of governments. The case studies integrate data and analysis already reported elsewhere by government bodies. Local data sources were prioritized, and data was collected and presented at the most granular level available. We used state information when county information was not available.
County and state budget documents and state agency websites were the primary data sources. Federal agency websites and reports also provided critical information on employment in extractive industries, proved reserves
The goal of these case studies is to bring information about extractive industries’ impacts on local communities and governments to the public in a clear, digestible way. We reached out to each county we profiled to communicate the purpose of these case studies, verify content, and lay the foundation for future collaboration.
To learn more about the interactions between governments and extractive industries in your community, consider researching:
- Nongovernmental websites and publications
- Industry reports and public tax filings
- Energy think-tank memos
- Industry association reports
- University publications
- Environment impact statements
You can also request government data that isn’t online or otherwise available through a Freedom of Information Act request.
Duke University Energy Initiative, Shale Public Finance: Local government revenues and costs associated with oil and gas development, 2014 ↩