Severance taxes are taxes on the extraction of natural resources such as oil and natural gas. These taxes constitute only a small percentage of state and local general revenue nationally, but can account for a substantial share of revenue in a few, natural resource-rich states—notably, Alaska, North Dakota, and Wyoming.
State and local governments collected a combined $12 billion in revenue from severance taxes in 2020, or 0.3 percent of general revenue. That total was down from $15 billion in 2019. Severance tax revenue is inherently volatility. Over the past decade, it reached a high of $20 billion in 2012 and a low of $9 billion in 2016 (all in 2020 inflation-adjusted dollars). However, even at its peak, severance tax revenue was still less than 1 percent of state and local general revenue.
Further, severance tax revenue is highly concentrated in a few states. In fact, combined revenue from North Dakota, Texas, New Mexico, and Oklahoma accounted for nearly 75 percent of all state and local severance tax revenue in 2020.
Related, the tax was a major source of revenue in only a few states. In 2020, severance tax revenue accounted for 18 percent of North Dakota’s state and local general revenue, followed by Alaska, New Mexico, and Wyoming (5 percent in each state). Oklahoma, Montana, Texas, and West Virginia were the only other states in 2020 where the tax accounted for more than 1 percent of state and local general revenue.
Texas collected the most severance tax revenue of any state in 2020 ($4.3 billion), but because its population, economy, and general revenue collections are far larger than other severance tax-dependent states, Texas's severance tax is a relatively small share of its general revenue (2 percent).
In the early 2010s, Alaska depended on severance tax revenue more than any other state, in part due to the state's production and the high price of oil at the time. In fact, in 2012, Alaska collected over $6 billion in real severance tax revenue (in 2020 dollars) and the tax accounted for a third of Alaska’s general revenue. However, because of changes in production and price, Alaska’s real severance tax revenue fell sharply over the next few years: $4.3 billion in 2013, $2.7 billion in 2014, and $693 million in 2015 (all in 2020 dollars). In 2020, Alaska collected $611 million in severance tax revenue.
Fifteen states and the District of Columbia did not have a severance tax in 2020. California does not have a severance tax but does levy a small assessment fee on oil and gas produced in California, and the Census Bureau records this as severance tax revenue.
The volatility of severance taxes poses a challenge to states in which they are an important revenue source, requiring such states to have flexible budgeting arrangements, other readily exploitable revenue sources, or significant rainy-day funds to accommodate unforeseen changes in severance tax revenue flows.
The COVID-19 pandemic and the war in Ukraine both significantly affected oil prices and made severance tax collections especially volatile. However, we do not have Census data for 2021 and 2022.
State Tax and Economic Review
Lucy Dadayan (reports are updated quarterly) (2020)
What Falling Oil Prices Will Mean for State Budgets
Norton Francis (2014)