Federal mineral royalty revenues are often overlooked, but they represent a substantial portion of some states’ revenues. Certain minerals, such as coal, oil, and gas, are available for extraction and production via a contractual agreement between a private producer and the federal government known as a mineral lease.[1] These leases grant rights to firms for a certain period of time and outline payments to be made by producers to the federal government.[2] Some of these payment revenues are then distributed back to the state in which the mineral production took place.
One of these payments is a royalty, which is calculated based on the amount of mineral production on the leased land. The term “royalty” is a historical artifact—it literally means “a payment to the crown.”[3] Today, the royalties are payments to a landowner (in this case, the federal government) for the right to extract minerals from the land. Payments are calculated as a percentage of revenue.[4] In fiscal year 2012, 36 states received federal mineral royalty disbursements totaling $2.1 billion.
In March, the Office of Natural Resources Revenue announced that, due to sequestration, $110 million in royalty revenue payments to states would be withheld.[5] Some state officials contend that royalty payments are the legal property of the states and have explored legal recourse to the federal government’s actions. The Department of the Interior, however, asserts that they are not exempt from sequestration.[6]
In the latter portion of the eighteenth century, many existing states had claims to lands in the West. The Land Ordinance of 1785 and the Northwest Ordinances of 1785 and 1787 ceded the western land claims of the early eastern states to the federal government, allowing the land to be sold. This enabled westward expansion, federal revenue generation, and paved the way for the creation of future states.[7] By 1821, seven states had emerged from public lands in the West, with ownership of portions of the land within their borders retained by the federal government.[8]
The push for development continued into the nineteenth century by means of the General Mining Law of 1872, under which the federal government granted permanent and exclusive mining rights with no royalty obligations. As time went on, some called for stronger oversight of the extraction process and questioned whether extraction was the best land use.[9] Further, critics questioned why firms were not required to forego a portion of profits to the owner of the land (the federal government).
These concerns led to the enactment of the Mineral Leasing Act of 1920, authorizing the Department of the Interior to lease federal lands “for the production of oil and gas and other hard minerals.”[10] It limited the lands on which mineral production could occur and required royalty payments to be made by the leaseholder.[11]
Today, the federal government owns approximately 28 percent of land within the United States.[12] Figure 1 shows the total land area within each state owned by the U.S. government.[13] Nevada has the largest portion of total area owned by the federal government (81.1 percent), followed by Utah (66.5 percent), Alaska (61.8 percent), Idaho (61.7 percent), and Oregon (53.0 percent).
Who should benefit monetarily as a result of mineral production on federally-owned land within the states? Though the federal government legally owns lands on which production takes place, opponents of federal mineral leasing argue that “not all costs of…leasing operations are internalized by the lessees.”[14] That is, “external costs are borne disproportionately by those citizens living near the projects”[15] because states must furnish services such as infrastructure and emergency production from which lease-holders benefit.
Rather than divest land from federal to state ownership, the government has opted to compensate states that contain federal lands on which production occurs via the disbursement of a portion of royalty revenues to affected states.
Mineral royalties collected by the federal government are disbursed to a variety of funds. Fifty percent of onshore lease revenue goes to the state in which the lease is located (except in the case of Alaska, where 90 percent of the royalties go back to the state), 40 percent is disbursed to the national Reclamation Fund[16] (except in the case of Alaska, where no Reclamation Fund disbursement takes place), and the remaining 10 percent goes to the U.S. Treasury.[17] In the case of offshore leases, 27 percent of all payments go to the state in which lease is located, $150 million is deposited to the Historic Preservation Fund each year, and the remaining money goes to the U.S. Treasury.[18]
Table 1 provides an overview of the recipients of federal mineral royalty disbursements in 2012.[19] The U.S. Treasury derives the most benefit, keeping nearly 55 percent of total royalty revenues. State governments receive 17.5 percent of total payments.
Fund
Amount
Share of Total
