State Budgets Tied to Fossil Fuels Are Slowing the Energy Transition and Leaving Workers and Communities Behind
Achieving America’s net-zero energy future and avoiding the worst impacts of climate change requires a rapid transition away from fossil fuels toward clean energy. But a significant source of state funding for important programs—including schools, public health, and infrastructure—relies on continued oil and natural gas extraction from federal lands. Simply put, direct payments from the federal government to states are higher when more oil and natural gas is extracted from public lands and waters, creating a perverse incentive to drill more. These payments are at odds with public policy objectives: The federal oil and gas program creates political opposition to climate policy and undermines efforts to build a more equitable economy that works for all Americans.
Dependence on oil and gas to fund state budgets means the country can’t simply end production on public lands. Doing so would devastate communities whose economies and public revenues are tied to fossil fuel extraction. Short-term appropriations to transition budgets away from their reliance on fossil fuels are also not enough. Rather, the country needs structural and institutional transformation to invest in rural prosperity.
Dependence on oil and gas revenue can be resolved by replacing direct payments from fossil fuel extraction with a model that retains and builds public wealth in oil and gas communities over time. Saving and reinvesting fossil fuel revenue advances the energy transition by decoupling state budgets from annual extraction and realigning public revenue with climate, workforce, and rural development goals. Oil and natural gas will remain part of the energy mix for a decade or longer, but reform is needed now to allow time for transition strategies to take hold.
Reform is needed now to allow time for transition strategies to take hold.
States are overly dependent on oil and gas revenue
The federal fossil fuel program—which gives 50 percent of the revenue raised from drilling on public lands to the states—has led to dependence on continued oil and gas production. This means that states rely heavily on the fossil fuels industry to fund essential services, including education, public health, and infrastructure. As a result—and without a plan to break the link—sunsetting fossil fuel production on public lands would have acute budget impacts.
This revenue dependence is intentional. For years, oil and gas industry lobbyists have supported federal and state policies that tie their activities directly to services, tax cuts, and immediate spending politicians and the public want. For example, Rep. Doc Hastings (R-WA), former chair of the U.S. House Committee on Natural Resources, stated in a committee hearing on the FAIR Act (an effort to open offshore areas to oil and gas leasing):
I believe it is crucial to recognize that revenue sharing will increase American energy production by creating new incentives for opening new offshore areas for drilling.
In Utah, state property tax rules prohibit local governments from retaining revenue from new renewable energy projects. Oil and gas, on the other hand, continues to send money directly into local coffers from taxes and royalties, rewarding politicians and taxpayers for supporting oil and gas development while disincentivizing clean energy. The oil and gas industry enjoys political support when state and local governments rely on continued drilling and extraction to pay for ongoing services. Meanwhile, politicians enjoy the popular act of cutting taxes enabled by revenues from the oil and gas industry. This system is broken, locks communities into fossil fuel dependence, and needs reform.
States will have difficulty transitioning budgets to a new economy because, once taxes have been lowered or eliminated in favor of narrow industry taxation, it is difficult—and sometimes impossible due to state constitutional limits—to rebuild a diversified tax structure. For example, new jobs in tourism, technology, or health care don’t pay the bills in Wyoming because the state’s tax structure is so narrowly focused on fossil fuels. Other economic sectors in Wyoming—such as recreation, high tech, or health care—don’t pay enough in taxes to support schools, highways, police, or social services.
Together, dependence on fossil fuel revenue and limits on raising taxes represent significant political and economic barriers to a just transition away from fossil fuels toward clean energy. The oil and gas industry understands the power of encouraging dependence on their activities to protect the status quo. Congress must help the climate and just transition communities meet this challenge by embracing solutions to realign public revenue with climate and rural development goals.
Congress must help the climate and just transition communities meet this challenge by embracing solutions to realign public revenue with climate and rural development goals.
A key place to begin is ending federal revenue sharing that distributes half of onshore oil and gas revenue—$2 billion on average—directly into state budgets each year. This system exacerbates dependence on fossil fuels and directly undermines efforts to achieve climate goals.
We must save and reinvest in people and communities
Congress must first end direct oil and gas revenue sharing payments and then replace them with a permanent solution: A new model that includes an endowment to capture and save fossil fuel revenue. New institutions—such as a national development corporation—can provide the autonomy, long-term view, and capacity to enable rural and resource dependent communities to lead local transition and development strategies. States must act, too, to remove barriers to raising revenue from renewable energy, conservation, and recreation economies. CAP will explore these policies—and how they build strong and resilient communities—in detail in a companion report.
Breaking the immediate link between fossil fuel extraction and essential services and replacing it with a new wealth-building approach that reinvests one-time fossil fuel revenue in permanent assets is essential to ensure a just transition for states, communities, and workers reliant on fossil fuels. State and local governments benefit when public wealth is captured and reinvested directly into the areas where that wealth is produced and when those communities are empowered to build a brighter future. And, importantly, decoupling community needs from fossil fuel revenue will pave the way for advancing climate and conservation goals.
Mark Haggerty is a senior fellow at the Center for American Progress engaged in research and policy analysis related to climate, conservation, and rural prosperity. Nicole Gentile is the senior director for Public Lands at the Center.
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