Alaska, long dependent on severance tax for the bulk of its revenue, is the old guard. States like North Dakota and Ohio, which ramped up hydraulic fracturing (fracking) in recent years, are the new.
Across the country, severance tax collections have increased in previous years as states tap natural resources that were previously unavailable. According to the U.S. Census Bureau’s 2012 Annual Survey of State Government Tax Collections (the most recent yearly data available), severance taxes were up $4.2 billion nationwide. Severance tax collections (which include taxes on extraction of natural resources such as oil, timber, minerals, etc.) were up 29 percent in 2012 over 2011, and had increased by about the same percent between 2010 and 2011.
States that have not typically relied on severance tax for significant revenue in the past may be increasing reliance on it. For example, in Ohio this December, state House Republicans proposed an increase in the tax on oil and gas drilling (H.B. 375), which a sponsor told The Columbus Dispatch will raise about $1.7 billion over 10 years. Part of the money would be used for regulatory and geological survey activities, while the rest would be used to fund an income tax reduction for Ohioans, according the bill’s legislative summary.
Contrast that with Alaska, which this year is ringing in its biggest severance tax overhaul in several years. Alaska’s tax cut, known as the More Alaska Production Act (also known as MAPA; S.B. 21), was signed by the governor in 2013 and the lion’s share of the changes started Jan. 1. However, the measure has been controversial enough to trigger a referendum seeking repeal of the cuts, set for the August primary elections.
The heart of the issue is that Alaska policymakers say they are trying make the state more competitive on taxes and attract new oil and gas industry investment, while MAPA opponents fear the new tax structure is a giveaway to oil and gas producers. The cuts come at a time when oil production and corresponding revenue have fallen in Alaska, and included in the new provisions are incentives for production of oil from new areas.
Could the ideas behind these tax cuts of being more competitive with new players in the oil and gas market catch on in other states and slow the imposition of severance tax? Continue the discussion on Bloomberg BNA’s State Tax LinkedIn group.
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