Jurisdictional Tax Competition and the Division of Nonrenewable Resource Rents

Article

Abstract

This paper presents a model of nonrenewable resource extraction across multiple jurisdictions which engage in strategic tax competition. The model incorporates rents due to both resource scarcity and capital scarcity as well as intra-region Ricardian rents. Regions set taxes on nonrenewable resource production strategically to balance tax revenues and local benefits from investment conditional on other regions’ tax rates. A representative extraction firm then allocates production capital across regions and time to maximize the present value of profits. Generally, we find that the division of resource rent between firms and regional governments ultimately depends on the relative scarcity of natural and production capital, relative costs across space, and the value regional governments place on economic activity. This theoretical result provides policymakers with information on the determinants of optimal tax rates and motivates future empirical research on the factors influencing the division of resource rent in practice.

Keywords

Strategic tax competition Severance tax Hotelling Oil production Dynamic optimization 

References

  1. Alcott H, Keniston D (2014) Dutch disease or agglomeration? The local economic effects of natural resource booms in modern America. No w20508. National Bureau of Economic Research, CambridgeCrossRefGoogle Scholar
  2. Anderson ST, Kellogg R, Salant SW Hotelling under pressure. J Polit Econ (forthcoming)Google Scholar
  3. Benchekroun H, Halsema A, Withagen C (2009) On nonrenewable resource oligopolies: the asymmetric case. J Econ Dyn Control 33(11):1867–1879CrossRefGoogle Scholar
  4. Brueckner JK, Saavedra LA (2001) Do local governments engage in strategic property—tax competition? Natl Tax J 54(2):204CrossRefGoogle Scholar
  5. Bucovetsky S (1991) Asymmetric tax competition. J Urban Econ 30(2):167–181. doi:10.1016/0094-1190(91)90034-5 CrossRefGoogle Scholar
  6. Chakravorty U, Gerking S, Leach A (2010) State tax policy and oil production: the role of the severance tax and credits for drilling expenses. In: Metcalf G (ed) US energy tax policy. Cambridge University Press, CambridgeGoogle Scholar
  7. Chirinko RS, Wilson DJ (2011) Tax competition among US states: racing to the bottom or riding on a seesaw? CESifo working paper, Public FinanceGoogle Scholar
  8. Devereux MP, Lockwood B, Redoano M (2008) Do countries compete over corporate tax rates? J Public Econ 92(6):1210–1235. doi:10.1016/j.jpubeco.2007.09.005 CrossRefGoogle Scholar
  9. Devereux MP, Loretz S (2013) What do we know about corporate tax competition? Natl Tax J 66(3):745 (European Union)CrossRefGoogle Scholar
  10. EIAa (2017) Crude oil production. https://www.eia.gov/dnav/pet/pet_crd_crpdn_adc_mbbl_a.htm. Accessed 14 Jan 2017
  11. EIAc (2017) Crude oil proved reserves, reserves changes, and production, series Proved reserves as of 12/31. http://www.eia.gov/dnav/pet/pet_crd_pres_a_EPC0_R01_mmbbl_a.htm. Retrieved 15 Jan 2017
  12. EIAd (2017) Crude oil proved reserves, reserves changes, and production, series Estimated production. http://www.eia.gov/dnav/pet/pet_crd_pres_a_EPC0_R01_mmbbl_a.htm. Retrieved 15 Jan 2017
  13. EIAe (2017) Domestic crude oil first purchase prices by area. https://www.eia.gov/dnav/pet/pet_pri_dfp1_k_a.htm. Retrieved 15 Jan 2017
  14. EIAf (2015) Assumptions to the annual energy outlook: oil and gas supply module energy information administration, US Department of Energy, Washington, DC. Accessed 15 Feb 2016Google Scholar
  15. EIAg (2017) Cushing, OK crude oil future contract 1. http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D. Retrieved 15 Jan 2017
  16. Gaudet G, Van Long N (1994) On the effects of the distribution of initial endowments in a nonrenewable resource duopoly. J Econ Dyn Control 18(7):1189–1198CrossRefGoogle Scholar
  17. Hotelling H (1931) The economics of exhaustible resources. J Polit Econ 39(2):137. doi:10.1086/254195 CrossRefGoogle Scholar
  18. Itaya J, Okamura M, Yamaguchi C (2008) Are regional asymmetries detrimental to tax coordination in a repeated game setting? J Public Econ 92(12):2403–2411. doi:10.1016/j.jpubeco.2007.08.003 CrossRefGoogle Scholar
  19. Jacquet J (2006) A brief history of drilling 1995–2005. Socioeconomic Analyst Advisory Committee, Sublette CountyGoogle Scholar
  20. James A (2015) US state fiscal policy and natural resources. Am Econ J Econ Policy 7(3):238–257CrossRefGoogle Scholar
  21. Janeba E, Osterloh S (2013) Tax and the city—a theory of local tax competition. J Public Econ 106:89–100. doi:10.1016/j.jpubeco.2013.07.004 CrossRefGoogle Scholar
  22. Kamien MI, Schwartz NL (2012) Dynamic optimization: the calculus of variations and optimal control in economics and management. Courier Corporation, New YorkGoogle Scholar
  23. Kanbur R, Keen M (1993) Jeux Sans Frontières: tax competition and tax coordination when countries differ in size. Am Econ Rev 83(4):877–892Google Scholar
  24. Kolstad CD, Wolak FA Jr (1983) Competition in interregional taxation: the case of western coal. J Polit Econ 91:443–460CrossRefGoogle Scholar
  25. Kolstad CD, Wolak FA Jr (1985) Strategy and market structure in western coal taxation. Rev Econ Stat 68:239CrossRefGoogle Scholar
  26. Maniloff P, Mastromonaco R (2014) The local impacts of hydraulic fracturing and determinants of Dutch disease. Colorado School of Mines Working Paper 2014-08Google Scholar
  27. Newell RG, Raimi D (2015) Oil and gas revenue allocation to local governments in eight states. No. w21615. National Bureau of Economic Research, CambridgeCrossRefGoogle Scholar
  28. Peralta S, van Ypersele T (2005) Factor endowments and welfare levels in an asymmetric tax competition game. J Urban Econ 57(2):258–274. doi:10.1016/j.jue.2004.10.007 CrossRefGoogle Scholar
  29. Pindyck RS (1978) The optimal exploration and production of nonrenewable resources. J Polit Econ 86(6):841. doi:10.1086/260714 CrossRefGoogle Scholar
  30. Roberts G, Gilbert B (2016) Drill-Bit Parity: the increasing importance of supply-side links in oil and gas markets. Available at SSRN: https://ssrn.com/abstract=2853118
  31. Saez E, Slemrod J, Giertz SH (2012) The elasticity of taxable income with respect to marginal tax rates: a critical review. J Econ Lit 2012:3–50CrossRefGoogle Scholar
  32. Thuot K (2014) Tracking the drilling rig frenzy. DrillingInfo. http://info.drillinginfo.com/drilling_rig_feeding_frenzy/. Accessed 15 Feb 2016
  33. Timmins C, Vissing A (2014) Shale gas leases: is bargaining efficient and what are the implications for homeowners if it is not? Duke University Working Paper. http://public.econ.duke.edu/~timmins/Timmins_Vissing_11_15.pdf. Retrieved 14 Sept 2015
  34. Weber JG (2014) A decade of natural gas development: the makings of a resource curse? Resour Energy Econ 37:168–183Google Scholar
  35. Wilson JD (1999) Theories of tax competition. Natl Tax J 52(2):269Google Scholar
  36. Wissman Stephanie Catarino (2015) Testimony before the Senate Environmental Resource and Energy Committee & Finance Committee. http://environmental.pasenategop.com/files/2015/06/API-Submitted-Testimony.pdf. Retrieved 22 Feb 2016
  37. Yücel MK (1986) Dynamic analysis of severance taxation in a competitive exhaustible resource industry. Resour Energy 8(3):201–218. doi:10.1016/0165-0572(86)90001-0 CrossRefGoogle Scholar
  38. Yücel MK (1989) Severance taxes and market structure in an exhaustible resource industry. J Environ Econ Manag 16(2):134–148. doi:10.1016/0095-0696(89)90004-1 CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2017

Authors and Affiliations

  1. 1.Division of Economics and BusinessColorado School of MinesGoldenUSA
  2. 2.Department of Agricultural and Resource EconomicsColorado State UniversityFort CollinsUSA

Personalised recommendations