Severance taxes are taxes imposed on the removal of
natural resources
Natural resources are resources that are drawn from nature and used with few modifications. This includes the sources of valued characteristics such as commercial and industrial use, aesthetic value, scientific interest and cultural value. ...
within a taxing jurisdiction. Severance taxes are most commonly imposed in oil producing states within the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...
. Resources that typically incur severance taxes when extracted include
oil
An oil is any nonpolar chemical substance that is composed primarily of hydrocarbons and is hydrophobic (does not mix with water) & lipophilic (mixes with other oils). Oils are usually flammable and surface active. Most oils are unsaturated ...
,
natural gas
Natural gas (also called fossil gas or simply gas) is a naturally occurring mixture of gaseous hydrocarbons consisting primarily of methane in addition to various smaller amounts of other higher alkanes. Low levels of trace gases like carbo ...
,
coal
Coal is a combustible black or brownish-black sedimentary rock, formed as rock strata called coal seams. Coal is mostly carbon with variable amounts of other elements, chiefly hydrogen, sulfur, oxygen, and nitrogen.
Coal is formed when ...
,
uranium
Uranium is a chemical element with the symbol U and atomic number 92. It is a silvery-grey metal in the actinide series of the periodic table. A uranium atom has 92 protons and 92 electrons, of which 6 are valence electrons. Uranium is weak ...
, and
timber
Lumber is wood that has been processed into dimensional lumber, including beams and planks or boards, a stage in the process of wood production. Lumber is mainly used for construction framing, as well as finishing (floors, wall panels, w ...
. Some jurisdictions use other terms like
gross production tax.
Note that severance taxes are used in jurisdictions where most resource extraction occurs on privately owned land and/or where sub-surface minerals are privately owned (for example, the United States). Where the resources are publicly owned to begin with (for example, in most
Commonwealth and
European Union
The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been de ...
countries), it is not a tax but rather a
resource royalty that is paid. In the case of the forestry industry, this royalty is called "
stumpage".
Oil and natural gas
Severance taxes are set and collected at the state level. States usually calculate the tax based on the value and/or volume produced; sometimes the method differs for oil, natural gas, and condensates.
Production from certain wells may be exempt from severance tax based on the amount of production (i.e. "stripper" wells) or the type of well (i.e. horizontal, tertiary, deep, etc).
As of 2021, 34 states collect a severance tax on oil and gas extraction.
As of September 2022, the Colorado severance tax was 1% of the gross income from oil and gas owed.
It is one of the lowest severance taxes in the US Colorado allows oil and gas producers to deduct their property taxes from their severance tax, so many oil and gas producers pay no severance tax whatsoever.
Incentives
Severance tax incentives in the form of credits or lower tax rates in order to encourage the production and expansion of oil and gas operations.
Endowments
Several U.S. states, including
New Mexico
)
, population_demonym = New Mexican ( es, Neomexicano, Neomejicano, Nuevo Mexicano)
, seat = Santa Fe
, LargestCity = Albuquerque
, LargestMetro = Tiguex
, OfficialLang = None
, Languages = English, Spanish ( New Mexican), Navajo, Ke ...
,
Wyoming
Wyoming () is a state in the Mountain West subregion of the Western United States. It is bordered by Montana to the north and northwest, South Dakota and Nebraska to the east, Idaho to the west, Utah to the southwest, and Colorado to the s ...
,
Colorado
Colorado (, other variants) is a state in the Mountain states, Mountain West subregion of the Western United States. It encompasses most of the Southern Rocky Mountains, as well as the northeastern portion of the Colorado Plateau and the wes ...
,
Alaska
Alaska ( ; russian: Аляска, Alyaska; ale, Alax̂sxax̂; ; ems, Alas'kaaq; Yup'ik: ''Alaskaq''; tli, Anáaski) is a state located in the Western United States on the northwest extremity of North America. A semi-exclave of the U.S. ...
and
Montana
Montana () is a state in the Mountain West division of the Western United States. It is bordered by Idaho to the west, North Dakota and South Dakota to the east, Wyoming to the south, and the Canadian provinces of Alberta, British Columb ...
, have created severance endowments. These range in size from about $800 million in Montana to more than $37 billion in Alaska. In theory, income from these permanent endowments remains available in perpetuity after resources are no longer being extracted.
See also
*
Natural resources consumption tax
The natural resource consumption tax is a kind of tax which is aimed to help ensure long run sustainability by increasing awareness of natural resource consumption.
International water
The popular conception of international waters is that the ...
*
Severance tax legislative history in California A severance tax is an article of legislation that imposes a tax on the extraction of natural resources. In the United States, California is the only state that does not impose a significant severance tax. Instead, California imposes a statewide ass ...
*
Stumpage
References
External links
Texas Severance Tax Incentives: Past and Present (Railroad Commission of Texas)Coal and Renewables in Central Appalachia: The Impact of Coal on the West Virginia State Budget (2010)Coal and Renewables in Central Appalachia: The Impact of Coal on the Tennessee State Budget (2010)
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Taxes by type
Resource extraction
Economics of primary sector industries
Supply-side economics
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