Severance tax

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A severance tax is imposed on the extraction of energy resources such as crude oil, natural gas, and coalbed methane. The term is based on the concept that energy resources are severed from the ground after they are extracted from the ground. States levy severance taxes on energy producers, and different states impose different requirements related to the tax. For example, some oil and/or gas wells may be exempt depending on how much they produce, or severance taxes may be levied on operations that do not yield a net profit. Severance taxes can be measured by the value or quantity of the extracted resource. 31 states levied severance taxes on oil and natural gas extraction as of June 2013.

Background

According to the National Conference of State Legislatures, severance taxes are generally paid by the resource producer, though the tax may be levied on the first purchaser of the resource. The tax can be levied at a flat rate per unit of a specific energy. For example, coal and ore mining taxes may be levied on a per tonnage basis. Oil may be taxed per barrel, and natural gas can be taxed per foot. Severance taxes can be graduated based on the value of the resource or the volume of production.

Examples of severance taxes

Below are descriptions of how severance taxes may be levied in a state.

• Production volume tax: This type of tax is levied on the volume of oil and gas produced. For oil, it can be levied per barrel of oil. For natural gas, the tax can be levied per one thousand cubic feet (or at other volumes above or below this number). Production value taxes may be adjusted annually to take into account changing prices in the market.
• Production value tax: This type of tax is levied on the value of the produced oil or natural gas. These taxes may be imposed on oil and gas at the same time that state governments provide reduced rates or exemptions for different kinds of oil and gas wells to offset the tax's impact. The tax can be applied at the point of production before transportation and distribution costs are factored. A value tax can also be imposed on gross income from oil or gas production or calculated and levied on a monthly basis.
• Value-volume tax: A value-volume tax combines the production volume and production value taxes.

See also

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  Crude oil

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  Natural gas

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  Gasoline prices

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  Glossary of energy terms