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 they often 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 $12.7 billion in revenue from severance taxes in 2018, or 0.4 percent of general revenue. That total was up from $9.0 billion in 2017 and $8.4 billion in 2016, but is still down from $14.0 billion in 2015 and $19.0 billion in 2014 (in 2018 inflation-adjusted dollars). However, even at its peak in 2014, 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, revenue in North Dakota and Texas accounted for nearly 60 percent of state and local severance tax revenue in 2018.
And the tax was a major source of revenue in only a few states. In 2018, severance tax revenue accounted for 20 percent of North Dakota’s state and local general revenue, followed by Alaska (8 percent) and Wyoming (6 percent). Louisiana, Montana, New Mexico, Oklahoma, Texas, and West Virginia were the only other states in 2018 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 2018 ($5.2 billion), but because its population, economy, and general revenue collections are far larger than other severance tax-dependent states, the 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 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, $2.6 billion in 2014, and $637 million in 2015 (in inflation-adjusted 2018 dollars). In 2018, Alaska collected $933 million in severance tax revenue, or 8 percent of its general revenue.
Sixteen states and the District of Columbia did not have a severance tax in 2018. 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.
State Tax and Economic Review
Lucy Dadayan (reports are updated quarterly) (2020)
What Falling Oil Prices Will Mean for State Budgets
Norton Francis (2014)