Taxing Natural Gas Production
 Severance and production taxes are excise taxes on natural resources extracted from the earth. In most states, taxes are applied to specific industries and are measured based on either the volume or value of resource produced, or a hybrid of both methods. Natural gas severance taxes are usually calculated based on the market value of natural gas or by using a fixed rate based on how many thousand cubic feet (MCF) are sold. According to the U.S. Census, the 35 states charging some sort of severance tax collected $13.4 billion in severance taxes for fiscal year 2009.1
Governments use revenue generated by severance taxes to contribute to their general funds, fund environmental remediation, pay communities impacted by resource development and mitigate increased government costs incurred by regulating and monitoring natural resource development. Every state collecting a severance tax contributes at least part of the revenue to its general fund. Some states also share funds with local governments and use them to finance public services such as education.
Some argue severance taxes—especially those which are high relative to neighboring states and those imposed early during exploration—limit production as developers seek states where resources can be extracted for less.2 Other research finds that energy taxes have little impact on energy producers’ actions. Changes in severance tax rates, even significant ones, can have large impacts on government revenues but not necessarily on industry production levels.3
More than 50 percent of U.S. natural gas is produced by the top five producing states alone which include Texas, Oklahoma, New Mexico, Wyoming and Louisiana.4 Of the 15 top natural gas producing states, Pennsylvania is the largest producer without a severance tax. In September 2010 the Pennsylvania House passed a bill implementing a severance tax on natural gas. The Senate version of the bill, SB 1155, would set a fixed tax rate of $0.39 per thousand cubic feet (MCF) of gas produced, generating $144.3 million in 2010-11 and $326.1 million in 2011-12.5 This legislation is still being considered.
Below is a chart of taxes on natural gas production in the 32 natural gas producing states. Comparing rates between states can be difficult since regulators use different calculations to determine the taxable sale and various forms of the tax are implemented. Many states also provide exceptions for certain types of wells or exemptions for a period of time.
Natural Gas Producing States (2007)
MCF = thousand cubic feet
| State |
Marketed Production (million cubic feet)
|
Method of Taxation |
| Alabama |
270,407 |
4-8%
|
| Alaska |
433,485 |
25% to 50% based on net value of oil and gas (value at point of production less all qualified lease expenditures)
|
| Arizona |
655 |
3.125% state rate (counties impose additional tax rates)
|
| Arkansas |
269,886 |
5% of market value
|
| California |
307,160 |
Assessed each June based on estimated budget for upcoming fiscal year and total amount of assessable oil and gas produced during the prior calendar year. For FY 2009/10, the tax rate was $0.0880312 per 10 MCF of natural gas produced.
|
| Colorado |
1,242,571 |
2% to 5% based on gross income
|
| Florida |
1,778 |
Adjusted annually depending on previous year's producer price indices (published by the Bureau of Labor Statistics). As of July 2010, a base rate tax of $0.285 per MCF is implemented.
|
| Illinois |
169 |
0.1% of gross revenue from oil and gas produced from each well
|
| Indiana |
3,606 |
Greater of 1% of the market value or $0.03 per MCF
|
| Kansas |
365,877 |
8% of gross value of oil and gas, less property tax credit of 3.67% which lowers tax to 4.33%
|
| Kentucky |
95,437 |
4.5% on gross value
|
| Louisiana |
1,363,538 |
$0.164 per MCF (adjusted annually)
|
| Maryland |
35 |
None
|
| Michigan |
264,907 |
5.25% (5% severance tax and 0.25% oil and gas fee)
|
| Mississippi |
73,460 |
$4.5 per MCF
|
| Montana |
116,848 |
Up to 15.06% on gross value of oil and natural gas production.
|
| Nebraska |
1,555 |
3% severance tax and 0.35% conservation tax (value of gas)
|
| New Mexico |
1,544,830 |
8.67% to 9.5% depending on county and school district
|
| New York |
54,942 |
No severance tax, but there is a property type production tax assessed on the amount of natural gas produced on the property
|
| Nevada |
5 |
5% of net proceeds when over $4 million
|
| North Dakota |
54,745 |
Annually adjusted flat rate per MCF. As of FY 2010/2011, the rate is $0.0914 per MCF
|
| Ohio |
88,095 |
$0.025 per MCF
|
| Oklahoma |
1,744,393 |
Graduated based on market value, plus 0.095% excise tax
– 7% when greater than or equal to $2.10 per MCF
– 4% when less than $2.10 but greater than or equal to $1.75 per MCF
– 1% when less than or equal to $1.75 per MCF
|
| Oregon |
409 |
6% of gross value
|
| Pennsylvania |
182,277 |
None
|
| South Dakota |
995 |
4.5% severance tax and 0.24% conservation tax on taxable value
|
| Tennessee |
3,942 |
3% of market value
|
| Texas |
6,091,724 |
7.5% of market value of gas produced
|
| Utah |
376,409 |
Graduated based on market value:
– 5% when greater than $1.50 per MCF
– 3% when less than or equal to $1.50 per MCF
|
| Virginia |
112,057 |
None
|
| West Virginia |
231,184 |
5% + $0.047 per MCF
|
| Wyoming |
1,923,224 |
6% of taxable value (gross sales minus certain processing and transportation costs)
|
Gas Production Source: U.S. Energy Information Administration, http://www.eia.doe.gov/neic/experts/natgastop10.htm
Tax Source: Information gathered from individual states and available upon request.
Notes:
1. U.S. Bureau of the Census, State Government Tax Collections in 2009. Washington, D.C., March 2010.
2. Wood, Micheal, Unintended Consequences: Proposed Tax Breaks for Natural Gas Industry Are Bad Deal for Pennsylvanians, Pennsylvania Budget and Policy Center, Harrisburg, PA. June 2010.
3. Energy Revenue in the Intermountain West: State and Local Government Taxes and Royalties from Oil, Natural Gas, and Coal. A Report from the Energy and the West Series by Headwaters Economics, Bozeman, Montana. October 2008.
4. U.S. Department of Energy, Office of Fossil Energy, Fossil Energy Study Guide: Natural Gas. http://fossil.energy.gov/education/energylessons/gas/HS_NatGas_Studyguide_draft2.pdf
5. Pennsylvania Budget and Policy Center, House Approves Natural Gas Severance Tax Bill, State Budget and Tax Policy, September 29, 2010. Accessed: October 2010.
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