State Budgets Benefit from Increased Energy Prices

Published June 1, 2006

New data from the federal government and several states show states that encourage natural resource recovery are collecting a revenue windfall from taxes on energy extraction.

Thirty-nine states have some form of severance taxes. The revenues they generate are a small share of total taxes collected by the states, according to the U.S. Census Bureau’s Government Division. Approximately $8 billion in severance taxes was collected in fiscal year 2005, roughly 1.2 percent of the $650 billion in total taxes collected by the states that year.

But in 11 states–Alaska, Colorado, Michigan, Mississippi, Nevada, New Mexico, North Dakota, Oklahoma, Texas, West Virginia, and Wyoming–revenue from severance taxes can be significant. Severance tax revenue in those states nearly doubled between FY 2002 and FY 2005.

Taxes on coal, natural gas, or oil removed from the ground are called severance taxes because they tax things “severed” from the Earth. The taxes are based either on the amount of material (barrel of oil, ton of coal, volume of natural gas) extracted or the sale price to the first purchaser. States also earn revenue for the removal of coal, gas, or oil from federally controlled land.

Wyoming a Big Winner

Wyoming may be the biggest current beneficiary of increased severance tax revenue. The state collected roughly $430 million in severance taxes in fiscal year 2003. That figure rose to $563 million in 2004 and $726 million in 2005.

In 2004 and 2005, severance taxes generated nearly half the revenue in Wyoming’s budget. Revenue from severance taxes might cover as much as 65 to 70 percent of state spending for the 2006 fiscal year, according to Buck McVeigh, administrator of the Economic Analysis Division in Wyoming.

McVeigh said taxes on natural gas are generating most of the new revenue. “Several of the biggest natural gas [fields] in the country are in Wyoming, and they have provided a real good revenue boost,” he said. McVeigh observes much of the natural gas taken from Wyoming is transported to California.

McVeigh also noted the royalties paid on mining on federal lands has been “robust.” Those royalties are paid to the state by the Mineral Management Service (MMS).

“As a result of the mineral activity, [Wyoming’s] unemployment rate is 2.9 percent,” said McVeigh. A March 16 New York Times article noted Wyoming has made commitments to increased funding for both education and infrastructure.

West Virginia Revenues Double

West Virginia also benefits from severance taxes. It will collect nearly twice as much from severance taxes in fiscal year 2006, more than $300 million, as it did in 2003, about $160 million.

Mark Muchow, director of fiscal policy in West Virginia’s Department of Tax and Revenue, said, “90 percent [of the increase in severance tax collections] is due to the increase in prices for coal.”

In West Virginia, severance taxes are based on gross receipts and not on the amount of coal mined. Muchow said coal is now selling for around $50 per ton, whereas a few years ago it was only $30 per ton.

Taxes on coal constitute most of the severance taxes collected in West Virginia. Muchow said 85 percent of the total is attributable to coal, while 10 percent is attributable to natural gas and the other 5 percent is from taxes on timber and other minerals.

Mining Increasing

Muchow also noted West Virginia has recently seen a rise in the amount of coal mined. During the past few years approximately 150 to 160 million tons were mined in the state. Before that, in 2002 and 2003, it was about 140 millions tons. Nevertheless, less coal is mined in the state today than in the late 1990s, when roughly 180 million tons were mined per year.

West Virginia allocates severance taxes in a variety of ways. The first $24 million goes to a special infrastructure fund. Of the remainder, 79.9 percent goes to the General Fund, 10.4 percent to the State Infrastructure Fund, 8.2 percent to local governments, and 1.5 percent to the Department of Forestry.

Muchow said some of the increased revenue is being used to fund pensions for state police and teachers. West Virginia also has lowered the sales tax on grocery items from 6 percent to 5 percent, offsetting the loss with severance tax revenues.

Michael Coulter ([email protected]) teaches political science at Grove City College in Pennsylvania.