The promise and peril of energy tax revenues

By Cate Long
April 13, 2012

Of the $763 billion in tax revenues that states collected in 2011, only $14.6 billion – less than 2 percent – came from severance taxes on coal, gas and oil. Energy production is very concentrated in the United States: Just nine states receive over 5 percent of their tax revenues from energy producers. Currently, the bulk of severance revenues comes from oil production. Alaska, a state floating on an ocean of oil, gets 76 percent of its revenues from a handful of big oil companies that have drilling rights on the North Slope of the state.

Although there has always been natural gas production in America, hydraulic fracking has given rise to substantial drilling activity in several Northeastern states along the Marcellus and Utica shale formations. Pennsylvania, West Virginia and Ohio have substantial reservoirs of natural gas, but the impact this boom will have on state finances is not yet known. These new supplies have come to market when demand is down and have swamped the nation’s usage and storage capacity, driving gas prices down to record lows. States that rely on, or plan for, revenues from energy severance taxes will face a lot of volatility from demand and price changes. Natalie Cohen, head of municipal research at Wells Fargo, sketched it out in a recent report:

Wyoming, for example, collects severance tax based on the taxable value of current-year production. With the drop in natural gas prices, it has had to reduce its forecast on severance tax revenue. The state is now looking to cut 4% out of next year’s budget, despite a current-year budget surplus. According to the state’s Economic Analysis Division, each dollar drop in natural gas prices costs the state about $226 million in revenue.

[...]

State severance taxes may be volume-based, value-based, or a hybrid of the two. When prices are high and the demand for commodities like oil and gas is robust, it is no coincidence that states with rich mineral deposits that tax extraction have weathered the economic downturn better than others.

Texas has managed to survive price fluctuations over the years and is one of the few states that does not impose an income tax. Texas, like New Mexico and Alaska, has created an endowment that was originally based on mineral lands to support K-12 and higher education. Some of the “newer” shale gas states, such as Pennsylvania and Ohio are concerned that severance taxes might chase away producers. But, high severance taxes have not hampered exploration in Texas, which levies the highest tax rate.

It is difficult for any state to forecast revenues accurately for future periods because so much is dependent on the general state of the economy. Most states derive the bulk of their revenues from sales and personal income taxes, which are very sensitive to economic conditions. But states like Alaska, North Dakota, New Mexico and Oklahoma rise and fall with the energy demand cycle. It’s unlikely in the near term that Pennsylvania, West Virginia and Ohio will see big windfalls from their gas production.

Further:

Kroll Bond Ratings: Potential Impact of Natural Gas Fracking on Municipal Bond Issuers

Census Bureau: 2011 state tax collection data (Google spreadsheet)

2 comments

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Bunch of facts without a clear “point” made.

Posted by OneOfTheSheep | Report as abusive

For a really nauseating time, research how that Severance Tax money is actually distributed and spent by the different Local Government agencies in the various states. “Education” turns out to have a remarkably fungible definition when money is concerned.

Posted by ARJTurgot2 | Report as abusive