State Energy Revenues Update

By Judy Zelio and Lisa Houlihan

States that rely on natural resources for a substantial share of state revenues derive them from both state severance taxes and resource leases on federal lands within their borders.

Severance taxes are excise taxes on natural resources "severed" from the earth. They are measured by the quantity or value of the resource removed or produced. In the majority of states, the taxes are applied to specific industries such as coal or iron mining and natural gas or oil production. They are usually payable by the severer or producer, although in a few states payment is made by the first purchaser. The taxes usually are imposed at a flat rate per unit of measure, with coal and ore mining taxes levied on a tonnage basis, oil production taxes on a per barrel basis, and gas production taxes on a per foot basis, although the rates may be graduated based on volume of production or value of the products. "Value" may mean market value in some states and gross value in others. Taxable net value or net proceeds are determined by deducting certain items from the gross value or gross proceeds. Examples of deductions include production costs, ad valorem taxes and royalties paid. Evaporation for gas wells also might qualify as a deduction.

A variety of taxes appear under the general heading of severance taxes, as the following list from the Commerce Clearing House State Tax Guide demonstrates.

Severance Taxes Imposed by States

Source: Commerce Clearing House State Taxes, 2006.

The leap in crude oil prices recently has had a noticeable effect on state severance tax collections reported to the Census Bureau. In 16 states, severance taxes accounted for at least 1 percent of state tax collections in 2007, with Alaska leading the pack.

Many states dedicate severance tax revenues to specific purposes, the most common being:

Counties and other local governments (Colorado, Florida, Kansas, Kentucky, Louisiana, Mississippi, Montana, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Tennessee, West Virginia, Wyoming)
Conservation, reclamation and remediation (California, Colorado, Florida, Louisiana, Montana, New Mexico, Ohio, Oklahoma, West Virginia, Wyoming)
Schools (Minnesota, Montana, Nebraska, North Dakota, Oklahoma, Oregon, Texas, Utah).
Miscellaneous other purposes, such as Medicaid state matching funds (West Virginia); water development projects (Colorado, North Dakota and Wyoming), and administration of oil and gas wells (Indiana). Alaska's Constitution does not allow dedicated funds except for the Permanent Fund.

A different, yet related revenue source is the state share of mineral revenues from leases on federal lands and federal offshore oil and gas tracts. States received $1.9 billion during the federal fiscal year (FFY) 2007 that ended Sept. 30, 2007, compared with $1.24 billion in FFY 2004 and $2.2 billion in FFY 2006. The Minerals Management Service (MMS), a federal agency responsible for collecting, auditing and disbursing revenues associated with mineral leases on federal and American Indian lands, makes monthly distributions to states as it collects royalties, rents, bonuses and other revenues. For the majority of onshore federal lands, states receive 50 percent of the revenues while the other 50 percent goes to various funds of the U.S. Treasury, including the Reclamation Fund for water projects. Alaska receives a 90 percent share as prescribed by the Alaska Statehood Act.

According to the MMS, states use the money to fund local education, infrastructure projects and assistance to local counties where the energy production occurs. States may also receive appropriations from the offshore royalty-funded Land and Water Conservation Fund to help with park and land acquisitions. In addition, coastal states with producing federal offshore tracts adjacent to their seaward boundaries receive 27 percent of those mineral royalties. Remaining offshore revenues collected by the MMS are deposited in various accounts of the U.S. Treasury, with the majority of those revenues going to the general fund. As the table shows, Wyoming led in FFY 2007 distributions with $925.3 million as its share of revenues collected from mineral production on federal lands within its borders, including oil, gas and coal production. 

Posted June 2008.
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