The Hugoton gas field covering much of southwestern Kansas is one of the world’s largest natural gas fields. Discovered in the 1920s, production from the Hugoton has declined in recent decades as pressure in the producing reservoirs steadily declines. Nonetheless, the Hugoton still produces substantial quantities of natural gas, and its high helium content makes it especially valuable.
We visited Grant and Haskell counties to examine the public finance implications of the oil and gas industry, and found that oil and gas property makes up an enormous share of local property values. While agriculture is the leading source of employment in the region, both counties have historically relied on oil and gas to provide more than half of their property tax base. But as Figure 1 shows, oil and gas property can be highly volatile, creating planning challenges for local governments.
The state of Kansas requires that each county appraise oil and gas property according to a complex formula that hinges on the price of oil and gas, which is determined by the state each year. For example, if oil prices are $100/barrel at the time when the state sets the annual valuation rate, counties and other taxing entities such as school districts will receive revenue based on $100/barrel oil, regardless of price fluctuations throughout the course of the year. If, on the other hand, oil is selling for $50/barrel at the time of valuation, annual revenues will be based on this price, even if prices rise substantially later in the year.
This methodology has the tendency to exacerbate, rather than smooth out, the volatility of property tax revenues for local governments. With the currently low rate of oil and gas prices, local governments across Kansas with substantial oil and gas production are likely to see a large drop in property tax revenues in the coming fiscal year. It is important for counties that rely heavily on oil and gas property, such as Grant and Haskell, to save revenues in their reserve funds during high-price years, then use those reserves to cushion shortfalls.
According to state statutes, Kansas’ severance tax is designed to allocate a portion of its revenues to an oil and gas depletion fund, which sends funds to local governments during years of low oil and gas property tax revenues. However, the state has in recent years “swept” some of these revenues, allocating them for other purposes, and local officials in both counties are uncertain whether they will receive additional revenue from the depletion fund.
Overall, officials in both counties describe the oil and gas industry as a major positive contributor to their fiscal health. However, both also note the challenges of budgeting through volatile revenue cycles, and both would prefer the state’s policies for managing oil- and gas-related revenues to help smooth out, rather than exacerbate, the volatility of these cycles.
An oil rig in Haskell County
This research was carried out at the Duke University Energy Initiative with support from the Alfred P. Sloan Foundation.