State Energy Severance Taxes and Comparative Tax Revenues

The shale gas industry in the U.S. accounted for over 600,000 jobs in 2012. States’ revenue from the severance tax, which is a tax imposed on the production of oil and gas resources, has increased from $5 billion in 1993 to $20 billion in 2012. This spike in oil and gas production has accelerated the consumption of state and local transportation infrastructure due to the volume of heavy trucks and equipment needed for well sites; these heavy trucks are traveling over roads not built to support their weight. This increase in heavy traffic has created additional road maintenance needs not easily funded by traditional highway user fee mechanisms. This policy brief will address the issue of whether the current severance tax rates justify road use for well sites, or if there is a need for additional fees, by comparing the tax structure on oil and gas production in Texas to that of other producing states. In an attempt to provide a face-value comparison of tax rates, this brief describes the oil and gas tax structures for selected states and highlights the key differences between the states. Additionally, the brief presents a methodology used to compare effective taxes, including severance tax and property tax. Furthermore, the brief assesses the benchmark comparison, which compares the tax obligations of an artificially defined benchmark oil and gas company in different states. The main lessons learned are that a variety of taxes and fees have been and can be used to collect tax from oil and gas companies. Moreover, fees, incentives and exemptions are effective levers that are easier to change than are the tax rates. Tax rates and types used by states tend to be similar within a geographical region, but differ across geographical regions. Finally, Texas has a relatively low severance tax rate when compared to other states and has a low effective tax rate.