Overview of Severance Taxes | Russell T. Rudy Energy LLC
The shale revolution is bringing increased oil and gas production to many states. Some, like Texas, Oklahoma and Louisiana are old hands at regulating and taxing large volumes of these resources. For others, such as North Dakota and Pennsylvania, dramatic increases in volumes of oil and gas produced offer new opportunities and challenges. Predictably, severance taxes vary widely between states. However, Cassarah Brown wrote an excellent article on the subject last year. Following is a brief synopsis.
Severance taxes apply to oil, gas and other natural resources extracted from the earth. Thirty two states produce oil and gas, and all but three (Maryland, New York and Pennsylvania) have a severance tax. Three other states (North Carolina, Idaho and Wisconsin) do not have commercial oil and gas production, but have passed severance tax legislation. Some states also levy conservation fees.
Severance taxes can be based on the volume produced, the value of the production sold, or a combination of the two. Volume based taxes ignore price fluctuations, but are easily administered and adjusted to reflect changing market conditions. Value based taxes can be difficult to administer because they require constant monitoring by taxing authorities to insure correct prices are used in returns filed by operators. Value based tax revenues are particularly difficult for states to predict for budgeting purposes, as they can reflect both volume and price changes.
Colorado and Illinois tax gross income from oil and gas properties, and other states tax both volume and value produced. Some states, such as Oklahoma and Montana adjust their rates in order to participate in boom times and provide production incentives when prices crash.
Pennsylvania has opted for an impact fee rather than a severance tax. Every well in the state is taxed regardless of production volume. Other states, such as Ohio are looking at increasing severance tax rates in order to reduce state income taxes.
Exemptions, incentives, deductions and credits, can further complicate the calculation and comparison of severance taxes between states. Fortunately, Ms. Brown’s article contains extensive tables comparing severance taxes state by state as well as a listing of legislation pending at the time of publication. To read the article in its entirety, please go to the National Conference of State Legislatures website http://www.ncsl.org/research/energy/state-revenues-and-the-natural-gas-boom.aspx#ms .
