Brief State Oil and Gas Severance Taxes

Taxes on Oil and Gas Production

Technological developments have increased access to oil and natural gas reserves across the country.

Over the past several years, many states have considered measures to benefit from these newly accessible resources and to ensure that communities are reimbursed for the impact that oil and natural gas development may have on infrastructure.

As a primary approach, states have imposed taxes and fees on the extraction, production and sale of natural gas and oil. These “severance” taxes—taxes applied to materials severed from the ground—tax the extraction or production of oil, gas and other natural resources. 

Thirty-four states currently produce natural gas. In 2017, the five states that produced the most natural gas in the United States included Texas, Pennsylvania, Oklahoma, Louisiana and Wyoming. Pennsylvania is the largest U.S. natural gas producer that does not impose a severance tax—though the state does levy a per well impact fee. In April 2018, of the 31 crude oil-producing U.S. states, the five highest producing states included Texas, North Dakota, New Mexico, Oklahoma and Alaska. In total, 34 states have enacted fees or taxes on oil and gas production.

Severance Taxes by State

Thirty-four states have enacted taxes or fees on the extraction, production and sale of oil and natural gas. These “severance” taxes, which are applied to materials severed from the ground, tax the extraction or production of oil, natural gas and other natural resources. Select a state above to learn more about state severance taxes and how severance tax revenue is allocated in each state.

Alabama

Tax Type: Oil and Gas Production Tax

Tax Description: 2 percent of the gross value of gas or oil at point of production

Exceptions:

• 1 percent of the gross value for five years from first production for wells permitted July 1, 1996 through June 20, 2002
• 1.66 percent of the gross proceeds from offshore production at depths greater than 8,000 feet below mean sea level

Revenue Allocation: Revenues credited to the state general fund to defray costs associated with the conservation and regulation of oil and gas production.

Tax Type: Oil and Gas Privilege Tax

Tax Description: 8 percent of the gross value of gas or oil at point of production

Exceptions:

• 6 percent of the gross value of gas or oil at point of production for offshore wells producing more than 200 MCF per day at depths less than 8,000 feet and wells permitted after July 1, 1988.
• 4 percent of the gross value of gas or oil at point of production for: Offshore wells producing 200 MCF or 25 BBLs or less per day at depths less than 8,000 feet; Oil wells producing 25 BBLs or less per day; Gas wells producing 200 MCF or less per day; 3.65 percent of proceeds from offshore. production from depths greater than 8,000 feet below mean sea level.

Revenue Allocation:

• Submerged lands: 90 percent to state general fund and 10 percent to oil or gas producing county.
• Non-submerged lands: 25 percent to state general fund. Of the remaining 75 percent: 66.66 percent to state general fund and oil or gas producing county (via formula); 16.66 percent to oil or gas producing county; 16.66 percent to state general fund.

Alaska

Tax Type: Oil and Gas Production Tax

Tax Description:  35 percent of net production value for oil and gas, or the value at the point of production less all qualified lease expenditures.

Exceptions:

• The tax on gas production from the Cook Inlet Sedimentary Basin may not exceed annual taxable volumes produced multiplied by the average tax rate from April 1, 2005 to March 31, 2006.
• The tax on gas production from Cook Inlet leases or properties that began gas production after March 31, 2006 may not exceed the annual gas volumes produced multiplied by 17.7 cents per million cubic feet (mcf).
• The oil production tax for the Cook Inlet Sedimentary Basin may not exceed $1 per barrel.
• The oil and gas production tax may not exceed 4 percent of the gross value of the oil or gas at the point of production outside the Cook Inlet Sedimentary Basin and not including lands north of 68 degrees north latitude.
• For gas produced from leases or properties north of 68 degrees north latitude, that is used in-state, the tax may not exceed the annual gas volumes produced multiplied by 17.7 cents per mcf.
• The tax levied on oil and gas produced from leases and properties that include land north of 68 degrees north latitude, other than gas used in-state, may not be less than 4 percent or 3 percent or 2 percent or 1 percent or zero of the gross value at the point of production, based on the annual average price per barrel of North Slope crude on the U.S. West Coast.
• Under AS 43.55.201, the state collects a 1 cent per barrel conservation surcharge on taxable oil produced if there is less than $50 million in the Hazardous Release Fund.
• The State also collects an additional 4 cents per barrel conservation surcharge under AS 43.55.300.

Revenue Allocation: All revenue derived from the oil and gas production tax is deposited in the General Fund, except those payments received from an assessment or litigation, which are deposited in the Constitutional Budget Reserve Fund (CBRF).

Arizona

Tax Type: Transaction Privilege Tax

Tax Description: 3.125 percent on oil and gas production, of which: 1 percent collected for distribution base; 2.125 percent collected for non-shared base.

Revenue Allocation: Distribution base: 25 percent to municipalities; 40.51 percent to counties; 34.49 percent to state general fund; Non-shared base deposited into state general fund.

Arkansas

Tax Type: Severance Tax

Tax Description: Tax on market value of natural gas produced:

• 1.5 percent for new discovery gas, 24 months from date of first production
• 1.5 percent for high-cost gas, 36 months from date of first production, 12-month extension possible
• 1.25 percent for marginal gas
• 5 percent on natural gas not defined as new discovery or marginal gas
• 5 percent on high-cost gas following cost recovery period

Revenue Allocation: 5 percent of revenues deposited into state general fund; 95 percent of revenues deposited as special revenues distributed according to Arkansas Highway Distribution Law.

Tax Type: Oil Excise Tax

Tax Description: Tax on market value at time of severance: 4 percent of the market value when production averages 10 barrels or less per well per day; 5 percent of the market value when production averages more than 10 barrels per well per day.

Additional taxes on oil include: 0.005 (5 mils) per barrel of oil produced in Arkansas; 2 cents per barrel of oil produced in Arkansas

Revenue Allocation: 3 percent of revenues deposited into General Revenue Fund Account; Of remaining 97 percent: 75 percent to State Treasury Fund, 25 percent to County Aid Fund.

Tax Type: Oil and Gas Assessment

Tax Description: Up to 50 mills per barrel of crude oil or petroleum used or marketed, Up to 10 mills per MCF of natural gas produced and saved each month.

Revenue Allocation: Revenues credited to pay for costs associated with oil and gas conservation administration.

California

Tax Type: Oil and Gas Production Assessment

Tax Description: $0.5038349 on each barrel of oil and 10,000 cubic feet of natural gas produced. Rate established annually each June. Ad valorem taxes administered by county.

Revenue Allocation: No statewide severance tax. Assessment supports the Department of Conservation’s Division of Oil, Gas, and Geothermal Resources.

Colorado

Tax Type: Severance Tax

Tax Description: Levied on the gross income from crude oil, natural gas and oil and gas based on gross income:

• 2 percent if income less than $25,000
• 3 percent of the excess over $24,999 for income $25,000-$99,999
• 4 percent of the excess over $99,999 for income $100,000-$299,999
• 5 percent of the excess over $299,999 for income over $300,000

Exception: Oil produced from any well that produces 15 barrels per day or less of oil, and gas produced from wells that produce 90,000 cubic feet or less of gas per day exempt.

Tax Description: Tax on oil shale gross proceeds:

• 1 percent in first year
• 2 percent in second year
• 3 percent in third year
• 4 percent in fourth and all successive years

Exception: Oil Shale: The greater of 15,000 tons per day or 10,000 barrels per day are exempt.

Revenue Allocation: For oil and gas:

• $1.5 million transferred into the innovative energy fund
• Of remaining revenues: 50 percent credited to the state severance tax trust fund, 50 percent credited to the local government severance tax fund

Revenue Allocation: For oil shale:

• 40 percent of revenues deposited in state general fund
• 40 percent of revenues deposited in state severance tax trust fund
• 20 percent of revenues deposited in local government severance tax fund

Tax Type: Ad Valorem tax

Tax Description: Rates vary by county. Severance tax can be reduced to credit 87.5 percent of ad valorem taxes.

Revenue Allocation: Revenues go directly to Colorado local governments.

Tax Type: Oil and Gas Conservation Levy

Tax Description: Maximum $0.0017 of market value at wellhead; or 1.1. mills.

Florida

Tax Type: Oil, Gas and Sulfur Production Tax

Tax Description: Oil Rates (on gross value of oil):

• 12.5 percent on escaped oil
• 8 percent on ordinary oil production
• 5 percent on small well oil (less than 100 barrels/day)
• Tertiary oil based on tiered formula and updated annually: $0.219 per MCF for gas (2018).

Revenue Allocation: After refunds distributed, revenues deposited in the Oil and Gas Tax Trust Fund and dispersed to:

• General revenue fund of state
• General revenue fund of board of county commissioners of oil or gas producing county
• Mineral Trust fund
• Distribution to funds based on gas and oil rate classification.

Georgia

Tax Type: Oil and Gas Severance Tax

Tax Description: Establishes a severance tax: 3 cents per barrel of oil, 1 cent per 1,000 cubic feet of gas.

Authorizes county and municipal governments to collect a severance tax on oil or gas severed within the jurisdiction of the county or municipality, as follows: An amount not to exceed 9 cents per barrel of oil. An amount not to exceed 2 cents per 1,000 cubic feet of gas.

Revenue Allocation: Collected by the Department of Revenue.

Idaho

Tax Type: Oil and Gas Conservation Tax

Tax Description: 2.5 percent of gross income earned on gas and oil production.

Revenue Allocation: Revenues will be distributed, as follows, after refunds are distributed:

• 60 percent into Oil and Gas Conservation Fund
• 40 percent to state tax commission
• 28 percent to oil- or gas-producing county
• 28 percent to cities from oil- or gas-producing county
• 28 percent to the public school income fund
• 16 percent to the local economic development account

Illinois

Tax Type: Oil and Gas Production Assessment

Tax Description: 0.1 percent of gross revenue of oil and gas from each well in production.

Revenue Allocation: After refunds distributed, revenues go to Illinois Petroleum Resources Board.

Tax Type: Oil and Gas Severance and Production Tax

Tax Description: Beginning July 1, 2013

• 3 percent tax on value of oil or gas severed during first 24 months of well production
• 6 percent value of gas severed
• Oil (tax on value): 3 percent for wells producing less than 25 barrels per day; 4 percent for wells producing 25 or more but less than 50 barrels per day; 5 percent for wells producing 50 or more but less than 100 barrels per day; 6 percent for wells producing 100 or more barrels per day.

Exceptions: Wells producing 15 or less barrels per day, Tax rate reduced by 0.25 percent for wells at least 50 percent of workforce hours performed by Illinois construction workers.

Revenue Allocation: Revenues deposited in the General Revenue Fund.

Indiana

Tax Type: Petroleum Severance Tax

Tax Description: Tax at a rate equal to the greater of:

• 1 percent of the value of petroleum,
• 3 cents per MCF for natural gas
• 24 cents per barrel of oil

Revenue Allocation: Revenues deposited in the Oil and Gas Fund.

Kansas

Tax Type: Mineral Severance Tax

Tax Description: $1 per ton of coal, 8 percent tax on gross value of oil or gas.

Exception: Gas wells with gross value less than or equal to $87 per day; Low-producing oil wells

Revenue Allocation: Money for refunds distributed into mineral production tax refund fund. Of remaining revenues: 7 percent deposited in the special county mineral production tax fund.

For oil and gas for any county which had $100,000 or more in receipts: 20 percent to the mineral production education fund. The remainder credited to the state general fund.

Tax Type: Oil and Gas Conservation Fee

Tax Description: Oil: 91 mills per barrel, Gas: 12.9 mills per MCF.

Revenue Allocation: Revenues deposited in the Conservation Fee Fund.

Kentucky

Tax Type: Natural Resources Severance and Processing Tax

Tax Description:

• 4.5 percent of gross value of natural gas and other resources, except coal and oil.
• 4.5 percent of the market value of crude petroleum.
• Tax credit of 4.5 percent of gross value available for natural gas severed from a recovered inactive well.

Revenue Allocation: 50 percent deposited in Local Government Economic Assistance Fund and 50 percent deposited in state general fund. 

Louisiana

Tax Type: Natural Resources Severance and Processing Tax

Tax Description:

Gas severance tax rate adjusted annually and never to be less than 7 cents per 1,000 cubic feet:

• Full Rate (July 1, 2018 to June 30, 2019): $0.122
• Low-producing oil-well gas: $0.013
• Low-producing gas-well gas: $0.013
• Produced water-full rate (July 1, 2012 to June 30, 2013): $0.118
• Produced water-incapable oil-well gas: $0.024
• Produced water-incapable gas-well gas: $0.0104 well.

Oil (percent of value):

• Full rate oil/condensate: 12.5 percent
• Low-producing oil rate: 6.25 percent
• Stripper oil rate: 3.125 percent
• Reclaimed oil: 3.125 percent
• Produced water-full rate: 10 percent
• Produced water-incapable oil rate: 5 percent
• Produced water-stripper oil rate: 2.5 percent

Severance taxes on new discovery oil and natural gas wells suspended 24 months or until payout of well.

Revenue Allocation: 20 percent severance tax revenues, up to $500,000, allocated to producing parish. Remaining funds, up to base level determined by revenue estimates, allocated to Bond Security and Redemption Fund.

Revenues exceeding base level: 50 percent allocated to Louisiana Investment Fund for Enhancement and 50 percent to state general fund.

Tax Type: Oil Field Restoration Fee

Tax Description: $0.015 for every barrel of oil and condensate produced and $0.003 for every MCF of gas produced.

Revenue Allocation: Revenues deposited in oilfield site restoration fund.

Tax Type: Oil Field Restoration Fee

Tax Description: $0.015 for every barrel of oil and condensate produced and $0.003 for every MCF of gas produced.

Revenue Allocation: Revenues deposited in oilfield site restoration fund.

Michigan

Tax Type: Oil and Gas Severance Tax

Tax Description:

• 5 percent of the gross market value of gas
• 6.6 percent of the gross market value of oil
• 4 percent of the gross market value for stripper well crude oil

Revenue Allocation:

• 2 percent of revenue, a minimum of $1 million, deposited in the orphan well fund. Amount in fund may not exceed $3 million.
• Remaining revenue deposited in the state general fund
• General fund revenue greater than $16 million allocated for the payment of heating fuel costs credits.

Mississippi

Tax Type: Oil and Gas Privilege Tax

Tax Description:

• 6 percent of production value for oil and gas at point of production.
• 3 percent of production value for oil produced by enhanced oil recovery method.
• Tax exemptions and reduced rates for oil or gas produced from discovery wells, development wells and two-year inactive wells.

Revenue Allocation:

• Gas revenues: 66.66 percent of revenues allocated to the state and 33.33 percent to the producing county.
• Oil revenues: First $600,000: 66.66 percent to the state and 33.33 percent to the producing county. Next $600,000: 80 percent to the state and 20 percent to the producing county.
• Over $1,200,000: 85 percent to state and 15 percent to producing county.

Montana

Tax Type: Natural Gas and Oil Production Tax

Tax Description: Gas rates (percent of gross production value), working interest:

• First 12 months of qualifying production: 0.5 percent
• After 12 months: Pre-1999 wells: 14.8 percent, Post-1999 wells: 9 percent, Stripper natural gas pre-1999 wells: 11 percent.
• Horizontally completed well production: First 18 months of qualifying production: 0.5 percent. After 18 months: 9 percent.

• Oil rates (percent of gross production value), working interest: Primary recovery production: First 12 months of qualifying production: 0.5 percent. After 12 months: Pre-1999 wells: 12.5 percent; Post-1999 wells: 9 percent.
• Stripper oil production: First one through 10 barrels a day production: 5.5 percent. More than 10 barrels a day production: 9 percent. Stripper well exemption production: 0.5 percent. Stripper well bonus production: 6 percent.
• Horizontally completed well production: First 18 months: 5.5 percent. After 18 months: Pre-1999 wells: 12.5 percent. Post-1999 wells: 9 percent.
• Non-working interest: oil and gas wells subject to 14.8 percent tax.

Revenue Allocation: Revenues allocated to counties in varying amounts. Of remaining revenues:

• 2.16 percent deposited in the natural resources projects state special revenue account
• 2.02 percent deposited in the natural resources operations state special revenue account
• 2.95 percent deposited in the orphan share account
• 2.65 percent deposited in the state special revenue fund to be appropriated to the Montana university system
• All remaining revenues deposited in the state general fund.

Tax Type: Privilege and License Tax

Tax Description: Not more than 0.3 percent of market value per barrel of oil or 10,000 cubic feet of natural gas produced, saved, marketed or stored.

Revenue Allocation: Revenues credited to special revenue account for oil and gas board expenses.

Nebraska

Tax Type: Oil and Gas Severance Tax

Tax Description: 3 percent on value for natural gas and non-stripper oil severed and 2 percent on value for stripper oil severed.

Revenue Allocation: One percent of revenues deposited in Severance Tax Administration Fund.

• Balance of revenues: received from school lands deposited in the Permanent School Fund.
• Received from non-school lands: Up to $300,000 per year deposited in the State Energy Office Cash Fund (determined by legislature through appropriation process). Up to $30,000 per year allocated to the Public Service Commission for administration of the Municipal Rate Negotiations Revolving Loan Fund (determined by legislature through appropriation process). Remainder is deposited in the Permanent School Fund.

Tax Type Oil and Gas Conservation Tax

Tax Description: 0.3 percent tax on value of oil or gas at wellhead.

Revenue Allocation: Revenues deposited in the Oil and Gas Conservation Fund.

Nevada

Tax Type: Oil and Gas Conservation Fee

Tax Description: Up to $0.20 per 50,000 cubic feet of natural gas or barrel of oil.

Revenue Allocation: Revenues credited to the Oil and Gas Conservation Fund.

New Hampshire

Tax Type: Refined Petroleum Products Tax

Tax Description: 0.1 percent tax on fair market value per barrel of oil.

Revenue Allocation: Revenues deposited in the state general fund.

New Mexico

Tax Type: Oil and Gas Severance Tax

Tax Description:

• 3.75 percent of taxable value of oil or gas severed and sold
• 1.875 percent of taxable value for enhanced recovery project oil and gas
• 2.45 percent of taxable value for well workover projects in excess of production projection
• 1.85 percent or 2.8125 percent of taxable value for stripper wells

Revenue Allocation: Revenues deposited in the severance tax bonding fund and remaining revenues deposited in the severance tax permanent fund.

Tax Type: Oil and Gas Conservation Tax

Tax Description: $0.19 percent of taxable value of sold oil or gas.

Revenue Allocation: Revenues deposited in the Oil and Gas Reclamation Fund and the state general fund.

Tax Type: Oil and Gas Emergency School Tax

Tax Description:

Oil:

• 3.15 percent of taxable value
• 1.58 percent for stripper wells producing less than or equal to $15 per barrel
• 2.36 percent for stripper wells producing oil greater than $15 but less than $18 per barrel

Gas:

• 4 percent of taxable value
• 2 percent for stripper well with annual value less than $1.15 per MCF
• 3 percent for stripper wells with annual value greater than $1.15 but less than $1.35 per MCF.

Revenue Allocation: Revenues distributed to the state general fund.

Tax Type: Oil and Gas Ad Valorem Production Tax

Tax Description: Rate based on assessed value of property.

Revenue Allocation: Revenues deposited in the oil and gas production fund.

Tax Type: Natural Gas Processor’s Tax

Tax Description:

• 0.0065 per mmbtu of natural gas multiplied by adjustment factor
• Adjustment factor equal to the annual taxable value per MCF of natural gas divided by $1.33

Revenue Allocation: Revenues distributed to state general fund.

New York

Tax Type: Real Property Tax on Oil and Gas Units

Tax Description:

Each year the state charges gas producers:

• $3000 for 1,000,000 MCF
• $2000 for 500,000 to 999,999 MCF
• $1000 for 100,000 to 499,999 MCF
• Tiered thereafter based on amount

Each year the state charges oil producers:

• $600 for 20,000 barrels
• $300 for 10,000 to 19,999

North Carolina

Tax Type: Oil and Gas Severance Tax

Tax Description:

The amount of the severance tax is calculated as follows:

• Condensates: the applicable percentage rate of the gross price paid
• Gas: the applicable percentage rate of the market value
• Oil: the applicable percentage rate of the gross price paid

Current tax rates, effective until Jan. 1, 2019:

• Oil and condensates rate: 2 percent
• Marginal gas rate: 0.4 percent
• Gas rate:  0.9 percent

Revenue Allocation: Collected to administer the state's natural gas and oil reclamation regulatory program, to meet the environmental and resource management needs of this state and to reclaim land affected by exploration for, drilling for and production of natural gas and oil.

North Dakota

Tax Type: Oil and Gas Gross Production Tax

Tax Description:

• $.0705 per MCF of gas (changes annually on July 1)
• Gross production tax rate on oil is 5 percent of the gross value

Revenue Allocation:

• 30 percent of revenues deposited in the state Legacy Fund.
• Remainder distributed, via formula, to Oil and Gas Impact Fund and political subdivisions within state, including state general fund.

Tax Type: Oil Extraction Tax

Tax Description:

• 5 percent of gross oil value.
• Reduced to 2 percent for qualified production from wells outside the Bakken and Three Forks formations.
• If the trigger price of $90 is exceeded for three consecutive months the oil extraction tax rate increases to 6 percent and will revert to 5 percent after the trigger price is below $90 for three consecutive months.
• Stripper wells exempt.

Revenue Allocation: 30 percent of revenue credited to Legacy Fund. Of the remaining revenues: 20 percent credited to Resource Trust Fund, 10 percent credited to Common Schools Trust, 10 percent credited to Foundation Aid Stabilization, and 60 percent credited to state (distributed via formula).

Ohio

Tax Type: Severance Tax

Tax Description: $0.025 per MCF of natural gas, $0.10 per barrel of oil.

Revenue Allocation: 10 percent of revenue to the Geological Mapping Fund, 90 percent of revenue deposited in the Gas Well Fund.

Oklahoma

Tax Type: Gross Production Severance Tax

Tax Description: Tax on gross production and based on monthly average crude oil and gas prices:

• 7 percent for gross value of oil and gas production
• 2 percent levy on oil and gas wells drilled after July 2015 for 36 months; then increased to 7 percent

Exceptions:

• Incremental production from secondary and tertiary enhanced recovery projects
• Horizontally drilled wells
• Reestablished production from inactive wells
• Incremental production from production enhancement projects
• Production from deep wells
• Production from new discovery wells
• Production from wells drilled based on 3-D seismic surveys

Revenue Allocation: Revenues distributed to: General Revenue Fund, County Highway Fund, and revenue distribution to these funds varies based oil or gas tax rates.

Tax Type: Additional Excise Tax on Petroleum and Gas

Tax Description: .085 percent of the gross value on each barrel of petroleum oil (0.085 of 1 percent); 0.095 percent of the gross value of all-natural gas and/or casinghead gas (0.095 of 1 percent).

Revenue Allocation:

Revenues from oil:

• 82.634 percent deposited to the General Revenue Fund
• 10.526 percent deposited to Corporation Commission Plugging Fund
• 6.84 percent deposited to the Interstate Oil Compact Fund of Oklahoma

Revenues from gas:

• 82.6045 percent deposited to the General Revenue Fund
• 10.5555 percent deposited to the Corporation Commission Plugging Fund
• 6.84 percent deposited to the Interstate Oil Compact Fund of Oklahoma

Tax Type: Oil and Gas Production Fee

Tax Description: $0.0035 per barrel of petroleum liquid produced

• $0.00015 per MCF of natural gas produced
• Exception: oil and gas exempt from oil and gas production tax

Revenue Allocation: 3 percent of revenues deposited in the Oklahoma Tax Commission Revolving Fund and the remaining revenues, after July 1, 2013, deposited in the Sustaining Oklahoma’s Energy Resources Revolving Fund.

Oregon

Tax Type: Oil and Gas Production Tax

Tax Description:

• 6 percent of gross value of oil or gas well production
• First $3,000 in gross sales values from each calendar quartile exempt
• Credits for ad valorem taxes on oil or gas production

Revenue Allocation: After refunds distributed and after funds distributed to Department of Revenue for expenses related to tax: Revenue deposited in Common School Fund.

Pennsylvania

Tax Type: Unconventional Gas Well Fee (no severance tax)

Tax Description: Fee on oil or gas well. Fee changes annually with price of natural gas. For the years 2015 to 2016, natural gas was taxed at 5 percent. For 2017 to 2018, the fee was 6.5 percent.

Revenue Allocation:

Revenue deposited in the Unconventional Gas Well Fund with the following earmarks:

• County Conservation Districts: $7.5 million
• Pennsylvania Fish and Boat Commission: $1 million
• Public Utility Commission (PUC): $1 million
• Department of Environmental Protection: $6 million
• PA Emergency Management Agency: $750,000
• Office of State Fire Commissioners $750,000
• Dept. of Transportation $1 million
• Marcellus Legacy Fund (Natural Gas Energy Development Program): $2.5 million

After earmarks: 60 percent revenues given to counties and municipalities through the unconventional gas well fund and 40 percent of revenues allocated for statewide initiatives through the Marcellus Legacy Fund.

South Dakota

Tax Type: Energy Minerals Severance Tax

Tax Description: 4.5 percent of taxable value of energy minerals (including oil and gas).

Revenue Allocation: 50 percent of revenues distributed to county in which the energy minerals or mineral products were severed and 50 percent to State General Fund.

Tax Type: Conservation Tax on Severance of Energy Materials

Tax Description: Excise tax of 2.4 mills of the taxable value of any energy minerals (including oil and gas) severed and saved.

Revenue Allocation: Revenues from oil and gas deposited in the Environment and Natural Resources Fee Fund for gas and oil conservation.

Tennessee

Tax Type: Gas and Oil Severance Tax

Tax Description: 3 percent of sale price of natural gas and crude oil.

Revenue Allocation: One-third of revenues allocated to producing county and two-thirds of revenues deposited in the state general fund.

Texas

Tax Type: Gas and Oil Production Tax

Tax Description:

• 7.5 percent tax of gas and liquid hydrocarbons market value
• 4.6 percent tax of oil market value or 4.6 cents for each barrel of 42 standard gallons of oil produced in this state, whichever rate results in the greater amount of tax
• 4.6 percent tax of gas condensate market value for gas condensate
• Incentives and exemptions for inactive wells, marginal wells and high cost gas wells

Revenue Allocation: 0.5 percent of revenues used for enforcement of production tax and tax provisions

• Remaining revenues: 25 percent deposited in the Foundation School Fund and 75 percent deposited in the General Revenue Fund.

Tax Type: Oil and Gas Field Clean-Up Regulatory Fee

Tax Description: $0.006625 per barrel of crude oil and $0.000667 per MCF of gas

Revenue Allocation: Revenues deposited in the Oil and Gas Regulation and Cleanup Account; revenue in account may not exceed $20 million or fall below $10 million; fund used to plug abandoned or orphan wells.

Utah

Tax Type: Oil and Gas Severance Tax

Tax Description: Oil (percent of market value): 3 percent if valued at $13 or less per barrel; 5 percent if valued above $13 per barrel. Gas (percent of market value): 3 percent if valued at $1.50 or less per MCF; 5 percent if valued above $1.51 per MCF and 4 percent of value for natural gas liquids.

Taxes not imposed on oil and gas stockpiled for over two years, stripper wells and the first six months of production for development wells. Enhanced recovery projects receive a 50 percent tax reduction.

Revenue Allocation: Revenues earmarked (via formula) to: Uintah Basin Revitalization Fund for revenues produced from oil or gas on Ute land. Navajo Revitalization Fund for revenues produced from Navajo Nation land. After earmarks: Revenues deposited to the general fund; revenues exceeding $27,600,000 deposited in state permanent trust.

Tax Type: Oil and Gas Conservation Fee

Tax Description: $0.002 of the value of gas or oil.

Revenue Allocation: Revenues credited to the Oil and Gas Conservation Account of the General Fund. Used for plugging or reclaiming abandoned wells, boring holes and mineral/petroleum resources and industry education programs.

Virginia

Tax Type: City and County License Taxes on Severed Materials

Tax Description: County or city governing bodies authorized to impose: 1 percent gross severance tax gross receipts from the sale of gas and an additional 1 percent tax for local road improvement. Counties and cities can levy additional 1 percent gross tax on gas.

The Counties of Buchanan, Dickenson, Lee, Russell, Scott, Tazewell and Wise and the City of Norton: one-half of the revenues from this tax to be paid to the Virginia Coalfield Economic Development Fund.

Revenue Allocation: Revenue from additional gas tax deposited to the general fund of producing county or city. Revenues from additional gas and coal tax deposited in the Coal and Gas Road Improvement Fund.

West Virginia

Tax Type: Oil and Gas Severance Tax

Tax Description: 5 percent of gross value of natural gas or oil

Exception:

• Natural gas from wells producing less than 5,000MCF per day and oil wells producing less than 0.5 barrels per day. Wells not producing marketable quantities for five consecutive years exempt for up to 10 years.

Revenue Allocation:

• 90 percent of revenue deposited in the general fund.
• First $24 million of the severance taxes collected, including those from coal and other minerals, allocated to debt service for infrastructure bonds.
• 3 percent of the Severance Tax that would be deposited into the General Revenue Fund is dedicated to West Virginia Future Fund.
• 10 percent allocated to counties and municipalities: 75 percent distributed to oil and gas producing counties and 25 percent distributed to all counties and municipalities, based on population densities

Tax Type: Worker’s Compensation Debt Reduction Act Tax

Tax Description: $0.047 per MCF of natural gas.

Revenue Allocation: Revenues deposited in the Workers’ Compensation Old Fund. Tax will be terminated when governor declares liability provided for in its entirety.

Wisconsin

Tax Type: Oil and Gas Severance Tax

Tax Description: 7 percent of market value of total oil or gas production.

Revenue Allocation: Revenues deposited in state general fund. 

Wyoming

Tax Type: Oil and Natural Gas Severance Tax

Tax Description: 6 percent of fair market value for natural gas or oil.

Exceptions:

• Oil stripper wells: 4 percent
• Tertiary oil production: 4 percent for first five years
• Renewed production: 1.5 percent for first 60 months
• Workover/recompletion production: 2 percent for first 24 months
• New wells drilled: 2 percent for first 24 months of production up to 60 bpd or 6 MCF/bbl gas equivalent

Revenue Allocation: Revenues from 1.5 percent of tax on fair market value for natural gas and oil, including stripper oil, deposited in the Permanent Wyoming Mineral Trust Fund. Remaining revenues collected in Severance Tax Distribution Account to be distributed following a formula.

Tax Type: Oil and Gas Conservation Tax

Tax Description: 0.05 percent

Revenue Allocation: Revenues credited to the Oil and Gas Conservation Commission.

Ways to Tax Oil and Gas Production

States differ in how to impose taxes on oil and gas, generally taxing a fraction of the market value, the volume produced or some combination thereof. Most states have enacted tax incentives, credits and exemptions to encourage or discourage production from certain well types. Many states impose oil and gas conservation fees, levies or assessments in addition to or instead of a traditional production or severance tax. These fees and assessments also tax the volume or value of the oil and gas produced.

Value Taxes on Oil and Gas Production

States most often tax the value of produced oil and gas. These taxes are applied at the point of production, before accounting for transportation and distribution costs. Value taxes can be difficult to implement because states must closely monitor gas and oil sales to determine the current market value. Further, because prices are prone to fluctuation, value taxes can make state revenue predictions difficult. Texas and Wyoming tax the assessed oil and gas value with reduced rates and exemptions to incentivize production from certain well types.

Two states—Colorado and Idaho—tax the gross income from produced oil and gas, rather than calculate the monthly market value. While Idaho has a flat rate, Colorado uses a tiered system.

Taxing the Volume of Oil and Gas Produced

Several states tax the volume of oil or gas produced, most often per barrel of oil or per 1,000 cubic feet of natural gas. While simple to implement, these taxes do not reflect price fluctuations. Gas and oil conservation fees and assessments commonly tax the volume produced with a relatively low flat rate, often adjusted annually. For example, Arkansas places a value tax on gas and oil through its severance tax in addition to a relatively modest fee per volume of oil and gas produced as an oil and gas assessment. States often design volume taxes to be easily adjusted, thereby adapting to the changing market value of gas and oil.

Value-Volume Taxes on Oil and Gas Production

Many states with severance taxes incorporate both the volume of oil and gas produced and the oil and gas market value or apply separate taxes to the volume and value. For example, Montana adjusts its tax rate on production value based on the volume of oil or gas a well produces, in addition to the age and classification of the well. Other states, such as Oklahoma, adjust their tax rates on gross production value based on the current value of gas. Such approaches aim to increase a state’s severance tax income when the oil and gas industries are thriving and reduce state pressure when the industry lags.

Controversy Surrounding Oil and Gas Severance Taxes

It is difficult to directly compare states’ severance tax revenue potential because approaches vary. For example, West Virginia applies a 5 percent flat tax on gross oil and gas production and provides exemptions for low-producing oil and gas wells. On the other hand, many states, including Mississippi, apply tax exemptions and incentives to high-cost gas wells, inactive wells and discovery wells to help encourage production. States may also provide tax credits to offset local taxes on oil and gas. Additionally, since methods to determine marketable value may vary per state, tax rates on the market value of oil and gas are difficult to compare.

Pennsylvania and Wyoming offer interesting examples of the controversy surrounding severance tax rates and their enactment.

Pennsylvania: Impact Fee versus Severance Tax

Pennsylvania is the largest U.S. natural gas producer that does not impose a severance tax. Instead, it levies an impact fee on every producing gas and oil well in the state, regardless of the volume produced. Studies by the Pennsylvania Budget and Policy Center estimate that while the state’s impact fee will continue to generate about $173-$227 million per year, a severance tax on production value would bring in $1.7 billion over five years. Governor Tom Wolf’s proposal would leave the impact fee in place, and bring the state’s effective tax rate to 4 percent, on par with other natural gas-producing states. However, severance tax opponents argue that a tax would deter gas production and that estimates of “missed” revenue do not account for tax exemptions and reductions that would reduce revenue from the proposed severance tax.  

Wyoming: Uncertainty Over Impacts of Proposed Severance Tax Cut

Proposed legislation in Wyoming attempts to balance revenue generation and private investment from oil and gas companies. Senate File 98 would cut the state’s severance tax from 6 percent to 3 percent for wells in their third and fourth years of oil or gas production. While lawmakers hope to incentivize new drilling, a study commissioned by the Wyoming State Legislature in 2000 suggests increased production would not make up for the loss of revenue from lowering taxes. Faced with a budget deficit of more than $800 million over the next two years, some lawmakers are not willing to risk the loss of revenue from a finite resource.

Distribution of Tax Revenues from Taxes and Fees on Oil and Gas Production

Severance and production taxes produce a relatively small portion of most states’ revenue. However, in 2016, Alaska and North Dakota’s severance taxes made up 37.5 percent and 41.8 percent of their total tax collections, respectively. States distribute revenues in various ways, but typically, most of the collected taxes are deposited into the general fund. For example, Alaska deposits all funds generated from its Oil and Gas Production Tax into the state’s general revenue fund.

States also use the revenue to fund conservation or environmental cleanup projects and distribute portions of the collected taxes to local governments. Additionally, some states reserve a portion of the collected taxes for permanent funds, whose earned interest can help balance state budgets. Many states appropriate revenue from these taxes to two or more of these areas. For example, Colorado deposits its Severance Tax on oil and gas into three major funds: the first $1.5 million into its Innovative Energy Fund, then the remaining funds are split, half to the state severance tax trust fund and the other half to the local government severance tax fund. Alternatively, North Carolina uses the revenue from its Oil and Gas Severance Tax to fund the natural gas and oil reclamation regulatory program, to meet its environmental and resource management needs and to reclaim land affected by exploration for, drilling for and production of natural gas and oil.