Severance Taxes Don’t Work, States Learn The Hard Way

natural gas industryBrittany Thomas
Coordinator, External Affairs
Cabot Oil & Gas


Several states that have severance taxes on fossil fuel extraction are forced to re-evaluate their budgets because of revenue shortfalls due to low production and prices.

There may be a new date on the calendar, but some things still haven’t changed regarding the push for the institution of a severance tax in Pennsylvania. We’ve covered this topic before, including the estimated $855 million in contributions from the current impact fee. The Pennsylvania State Association of Township Supervisors recently highlighted some of the uses of this funding in their newsletter.

Yet some continue to call for the institution of a tax to fund education or otherwise help close gaps in the yet-to-be-passed state budget. Many of the same folks point to the states with an established Severance Tax like Texas, Oklahoma, West Virginia, Alaska and North Dakota as the model of what should be.

But according to a report by the U.S. Energy Information Administration published on January 12, these very same states which are held as an ideal model by some are seeing reductions in taxes due to the falling prices of oil, gas and coal. You can read the details and the measures these states are implementing in order to maintain a workable budget below. It’s also worth noting that many of these states also collect revenue from the coal industry, which would not be the case if implemented here in Pennsylvania.

severance taxes

While the impact fee revenues are also down in Pennsylvania due to decreased production, there are three distinct advantages this model retains over a severance tax model.

  1. The current impact fee model is structured so that payments on a spudded well follow a set schedule for the following years, allowing for easier calculation on income levels. For more on this, the Public Utility Commission has a guide for the three-year schedule of fee payment.
  2. The impact fee structure is designed to distribute the bulk of the funding to areas with natural gas development and the remaining amounts distributed elsewhere. This format means budgets – from municipalities to counties – will be more diversified rather than relying on this funding alone.
  3. The proposed severance tax is only on natural gas versus the method of taxing multiple forms of energy or natural resources (coal, timber, aggregate etc.) which leads to more variation in collections due to the reliance on just one industry.

One can only hope our legislators look at this information as a warning against using a severance tax based on only one industry to prop up a hemorrhaging state budget.

State severance tax revenues decline as fossil fuel prices drop

Severance Taxes

Department of Commerce, U.S. Census Bureau, Quarterly Summary of State and Local Taxes

Several states that collect significant revenue from severance taxes on fossil fuel extraction are re-evaluating current and upcoming operating budgets and taxation structures to address revenue shortfalls. Severance taxes are often imposed on the extraction of nonrenewable resources such as crude oil, natural gas, and coal. Lower fossil fuel prices, and in some cases, lower production, have led to lower severance tax receipts than were expected when revenue estimates were developed.

Six states strongly affected by this budget squeeze are Alaska, Texas, North Dakota, Wyoming, Oklahoma, and West Virginia.

Alaska. Alaska’s severance tax revenue has fallen further and faster than other states because its tax is based on the operators’ net income rather than on the value or volume of oil extracted. In 2015, when average net incomes after operating and capital expenses were near zero, the state derived practically no revenue from this tax, versus more than $5 billion in 2012. Based on 2014 data, severance taxes accounted for about 72% of the state’s tax revenue. Given the sharp decline in severance tax revenues, the governor recently proposed a 6% state income tax as well as scaling back the payout of dividends to residents from Alaska’s Permanent Fund.

Texas. The comptroller of Texas reports that as of November 2015, revenues from natural gas production and oil production and regulation were down 48% and 51%, respectively, from a year ago. Texas’s economy is more diversified than that of other major oil-producing states, and severance taxes account for a lower percent of its tax total receipts (11% in 2014), meaning Texas can likely respond to the lower severance tax receipts without drastic changes to its enacted 2016 budget.

North Dakota. Despite oil production volumes remaining largely flat throughout 2015, total severance tax revenues fell from more than $3.5 billion in 2014 to $2 billion in 2015 as oil prices declined. The state’s general fund budget collections from July through November 2015, the first five months of the 2015-17 two-year budgeting period, were $152 million, which was 8.9% below the budgetary forecast. The below-budget revenue was attributed to weaker sales tax collections, which are in part driven by oil exploration and production in the Bakken region. If projected revenue remains 97.5% or less of the budgeted amount, across-the-board spending reductions would be imposed for most state agencies.

Severance Taxes

Department of Commerce, U.S. Census Bureau, Quarterly Summary of State and Local Taxes. Note: In Wyoming, revenue collections for the production year are due in February, and third quarter payments are not required.

Wyoming. Mineral severance taxes from oil, natural gas, and coal production, along with associated federal mineral royalties, are the primary revenue sources for Wyoming. Severance taxes alone accounted for 39% of the state’s receipts in 2014. However, despite recent increases in oil production, Wyoming is seeing lower revenue projections in response to lower oil prices and declining natural gas and coal production. In October 2015, the state revised its 2015-18 severance tax projections downward by nearly $160 million from January 2015 projections.

Oklahoma. Although severance taxes accounted for 8% of Oklahoma’s revenue collections in 2014, collections from state sales taxes and individual and corporate income taxes are also significantly affected by oil and natural gas prices. The state faces a fiscal year 2017 budget deficit of $900 million on a general fund budget of nearly $7 billion. In December 2015 the state declared a revenue failure, which requires state agencies to reduce spending, and allows for use up to 37.5% of the state’s budget stabilization fund.

West Virginia. Severance taxes accounted for 13% of West Virginia’s tax revenues in 2014. Falling coal production and low natural gas prices in the third quarter of 2015 resulted in the lowest total tax collection since 2008, mostly as a result of decreased severance tax receipts, helping create a projected fiscal year 2016 budget deficit of more than $250 million. West Virginia’s coal production in 2015 was down more than 15% from 2014. Lower natural gas prices have more than offset an increase in the state’s natural gas production, resulting in lower natural gas severance tax receipts. In October 2015, the governor announced 4% reductions to budgets for most state agencies.

Principal contributors: Robert McManmon, Grant Nülle

Reposted from Well Said Cabot.

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3 thoughts on “Severance Taxes Don’t Work, States Learn The Hard Way

  1. I’m trying real hard to understand the logic here. It’s something like: hey, because the Saudis drove the American fracking industry into the ditch, severance tax revenues are also in the ditch. Therefore, severance taxes are bad for the state because they go south when the industry goes bust.

    Why stop there? Why not have Cabot, Chesapeake, Range, etc become non profits and pay no taxes at all?

    • As Henry George said; “political economy is not a set of dogmas” but, rather “the explanation of a certain set of facts.” George also pointed “A tax on date trees caused Egyptian farmers to cut down their trees; but twice the tax, imposed on land, had no such result.” A severance tax is like a tax on date trees. Far better to tax the land itself at its fair market value (recognizing mineral rights) and give the owner of the land the incentive to develop those resources.

  2. I don’t understand your logic Dogma. To complain they don’t pay enough taxes then suggest they pay none by claiming non profit, doesn’t make a bit of sense.


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