Extras on Excise: Do Declining Severance Tax Revenues Await States at Finish Line in Race to the Bottom?


Oil and gas tax revenues have made big news in the past several years as more states are experimenting with hydraulic fracturing.  At the same time, some states such as Alaska have lowered their severance tax to encourage more companies to search for “gushers” in their state. But other states appear to ready to declare a cease fire in the tax competition war. Rather than continuing a race to the bottom, Ohio, Pennsylvania and West Virginia are attempting to unify their rates. The states appear to be exploring different tax policy approaches after many jurisdictions experienced a decline in severance tax revenues in 2013.

In 2013, all the states combined collected about $16.5 billion in severance taxes, according to a newly released report from the U.S. Census Bureau.

That sounds like big money, but it’s about 4.5 percent ($785 million) less than the states collected last year according to last year’s  report from U.S. Census Bureau .  

Where did some of the decreases come from? Fifteen states do not collect severance tax, so let’s “drill down” and compare the top ten severance tax jurisdictions between this year and last year’s Census report:

State

2013 Severance Tax Revenues (in thousands)

2012 Severance Tax Revenues (in thousands)

Difference

Texas

$4,647,848

$3,655,582

$992,266

Alaska

$4,016,966

$5,787,360

($1,770,394)

North Dakota

$2,457,530

$3,187,112

$744,305

Wyoming

$867,933

$968,525

($100,592)

Louisiana

$834,116

$885,982

($51,866)

New Mexico

$713,998

$767,736

($53,738)

West Virginia

$608,371

$626,203

($17,832)

Oklahoma

$515,981

$848,947

($332,996)

Nevada

$290,448

$303,038

($12,590)

Kentucky

$269,786

$346,050

($76,264))


Only two states out of these ten—Texas and North Dakota—increased its severance tax revenue this year.  Of all of the states that collect a severance tax, Texas, Alaska and North Dakota took in the most severance tax at $4.6 billion, $4 billion, and $2.5 billion, respectively. While Texas took in the most in total dollars, severance tax only accounts for around 9 percent of the total amount of tax Texas collected.  However, that still puts Texas in around 8th place for total percentage amounting from severance tax. 

Nationwide, severance tax makes up about 2 percent of state taxes, but several states are much more dependent on the revenue than that figure shows.  The highest percentage is collected in Alaska, where severance tax accounts for over 78 percent of taxes collected.  North Dakota gets just over 46 percent of its revenue from severance tax, and Wyoming gets just under 40 percent. 

On the other end of the spectrum, Missouri and Connecticut took in the least amount in severance tax at $30,000 and $8,000, respectively. As expected, they also had the lowest percentages of severance tax compared to total tax collected.

Some states have responded to declining tax collections by making their jurisdiction more attractive for oil and gas producers.   In November of last year, Alaska enacted legislation to cut oil and gas severance taxes and offer tax credits to companies in an attempt to encourage increases in production, according to the Weekly State Tax Report and the Washington Post.  

Other states, such as Ohio, Pennsylvania and West Virginia are apparently seeking a cease fire in the tax competition war by attempting to unify severance tax rates, credits and incentives to decrease competition between each other, according to the West Virginia newspaper, the State Journal

Continue the discussion on Bloomberg BNA’s State Tax Group : Why do you think severance tax collections are down compared to last year overall?   Should states coordinate their severance tax rates to reduce competition between them?

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