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Wednesday, February 15, 2006
609 It`s time to junk honor system for taxing minerals
Wyoming uses an ineffective method of collecting taxes from energy companies called the “honor system,” and like most systems of this type, it is prone to abuse.
And also on a federal level, there has been a lot of news lately about how hard it can be to collect federal royalty payments from these same energy companies.
It really causes a person to ask that if the feds can’t collect taxes from these huge international companies, how in the world does a small state government? And if our state government is ineffective, how does a government as small as a county collect such taxes? Or the Wind River Indian Reservation, for example.
At a time when the huge international energy companies are making record profits, some predictable news stories are showing up on the front pages of the country’s newspapers concerning tax collection failings.
It’s being reported that the federal government was shorted almost a half billion in mineral royalty taxes by energy companies last year. The New York Times reported over 30 energy companies fell behind on their payments, according to the Interior Department.
The companies included Chevron, Shell, Kerr-McGee, Anadarko and ConocoPhillips, most of whom operate here in Wyoming.
The feds are having a devil of a time getting royalty fees collected from these companies. The Times reports that the U. S. government only received $5 billion in royalties on natural gas last year when prices were sky-high. This total is barely even with what was collected in 2001, when prices were very low. The Times says, “One apparent reason for the shortfall is that the government has had trouble auditing the flow of the money.” Does that sound familiar to anyone here in Wyoming?
Then another news report talks about a crotchety old guy in Denver who has filed millions of dollars worth of suits against energy companies for not paying taxes. He is alleging that these companies are cheating the government and this codger has the chance to rake in millions in federal whistle-blower fees.
Jack Grynberg, 74, has filed 73 lawsuits concerning Wyoming federal tax payments. He has filed the suits in Casper, according to a Denver Post report. He has made a fortune over the years with his Grynberg Petroleum Co. and he says he knows that payments just are not being made.
Wonder if the members of the Wyoming legislature have the stamina to put into place some kind of penalty for people deliberately avoiding paying our severance taxes? I have long advocated having the CEO and CFO of the big companies having to personally sign off on the tax bills that they submit during our “honor system” tax paying situations.
Mr. Grynberg, whose company has interests in fields in the U.S., Africa and Kazakhstan, contends the rules are easy to bend. Among the ways companies can cheat are:
• Faulty metering. Companies use mechanical gauges instead of more-accurate digital meters to report gas flows.
•Disrupted flows. By analyzing the heat content of gas too close to an opening in the pipeline, test probes measure "dry methane," or skinny gas. Heavier hydrocarbons condense and cling to the inside of the pipe walls, bypassing the meter.
•Pressure drops. By measuring the heat content of gas far from a wellhead, pipelines can cause a sharp drop in temperature and pressure, which separates out gas liquids.
Now add to this a subject our Wyoming legislature does not like to deal with – the need for stricter auditing and more auditors when it comes to collecting severance taxes from these same companies.
A large amount of our state energy taxes are figured using this “honor system.” It is almost as bad as two people writing numbers on pieces of paper and then submitting them to the other and then working out what the tax payments should be.
Wyoming should place full-time auditors on staff with these big energy companies. The amounts of money are so big, it is insanity to assume the correct numbers are being collected.
Some years ago, Casper’s Tom Stroock warned folks that our so-called honor system was broke and prone to abuse.
Mr. Stroock said, “ It is unfortunately true that the state and the counties are foregoing millions of dollars in state royalties, federal royalties, severance taxes and ad valorem taxes due under existing statutes. Wyoming does not now possess the legal or audit capabilities necessary to make sure that we are being properly paid - so we are not.”
He continued: “We presently operate on a so-called honor system. The mineral taxpayers report their production and the prices claimed to the taxing and royalty receiving authorities and then follow this up with checks to cover the reported amounts. The state and the counties only have enough auditing staff and expertise to ensure that the checks are equal to the reported amounts. Most other states conduct detailed field and office audits on their taxpaying companies.
“With few exceptions, we don`t. When Jim Griffith was state auditor, he did conduct detailed state royalty audits. He found that for each dollar paid out in salaries and expenses to an auditor, Wyoming received more than $18 of increased revenue in return. A return of 18-1 would be a pretty good investment”
Two people as experienced as Tom Stroock and Jack Grynberg both have lots to say about the potential for fraud with the way energy companies pay their taxes in Wyoming.
Let’s just hope members of the Legislature are listening.
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