Severance taxes are levied when landowners sell nonrenewable resources such as oil, natural gas, iron, copper, and other natural resources for extraction. These taxes are typically assessed on the gross value of the resource and are paid by the party extracting the resource. Revenues from the taxes are typically split between local governments, which are most affected by the development of the resource, the state’s general fund, and, in some states, various education and environmental programs.
At least 36 states have some sort of severance tax, and 31 states specifically levy taxes on oil and natural gas development. Severance taxes on oil and gas generated $11 billion nationwide in 2010, and these taxes account for 10.5 percent to 74.3 percent of total state tax revenue in six states: Alaska, Montana, New Mexico, North Dakota, Oklahoma, and Wyoming.
Although some of the revenue generated from severance taxes is saved in the form of budget surpluses, much is spent in the general budget. In Oklahoma, state tax collections and state spending are at all-time highs, partly due to a 13 percent increase in revenue from severance taxes on oil and gas production. In March of this year, these taxes brought $75.57 million to the state treasury.
Even as these revenues increase, states such as Ohio, Oklahoma, and Pennsylvania are considering raising their severance tax rates. Although severance taxes can create budget surpluses for state governments, measures intended to raise the severance tax, such as those under consideration in Ohio and Oklahoma, would act as a direct cost increase to producers because natural gas prices are determined on a national scale and regional producers cannot pass these costs on to their consumers.
Pennsylvania is the largest gas-producing state without a severance tax, but that may soon change. A recent study modeling for a potential Pennsylvania severance concluded each $100 million in additional production costs imposed on gas extraction by a severance tax will reduce business sales by $22 million, cut personal income by $20 million, cause a decline in total employment of 292, and lower the state’s population by 143 people.
Road repair and an increased need for public services due to oil and natural gas production may merit some narrowly targeted form of taxation to help local governments keep up with the costs associated with natural resource extraction, but most tax revenues typically end up in the general fund or unrelated spending instead of being used to mitigate local impacts.
States without severance taxes should recognize that policy as a competitive advantage and resist the temptation to impose them.
The following documents provide additional information about severance taxes.
Oil and Gas Severance Taxes: States Work to Alleviate Fiscal Pressures Amid the Natural Gas Boom
The National Conference of State Legislatures lists the severance tax laws for states around the country.
Advocate: Tax Increase on Energy Drilling in Oklahoma Is Unneeded, Misguided
Writing in NewsOK, Dave Bond discusses the impact increasing the Oklahoma severance tax would have on job creators in the state.
Oklahoma Treasurer: Economic Momentum Continues
The Associated Press outlines revenue trends in the state of Oklahoma.
Baker and Passmore Release New Report on Potential Impact of Proposed Gas Severance Tax
This release summarizes a study from Pennsylvania State University scholars examining the costs and benefits of a gas severance tax in Pennsylvania.
Ten Principles of Energy Policy
Heartland Institute President Joseph Bast outlines the ten most important principles for policymakers confronting energy issues, providing guidance to help deal with ongoing changes in markets, technology, and policies adopted in other states, supported by a thorough bibliography.
Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Environment & Climate News Web site at http://news.heartland.org/energy-and-environment, The Heartland Institute’s Web site at http://heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Research Fellow Isaac Orr at [email protected] or 312/377-4000.