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 are often 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 $8.8 billion in revenue from severance taxes in 2017, or less than 1 percent of general revenue. That total was up from $7.9 billion in 2016 but down from $13.2 billion in 2015 and $17.9 billion in 2014. 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 more than half of state and local severance tax revenue in 2017.
And the tax was a major source of revenue in only a few states states. In 2017, severance tax revenue accounted for 17 percent of North Dakota’s state and local general revenue and 5 percent of Alaska’s and Wyoming’s general revenue. Montana, New Mexico, Oklahoma, Texas, and West Virginia were the only other states in 2017 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 2017 ($3.3 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.
Seventeen states and the District of Columbia did not have a severance tax in 2017. California does not have a severance tax but levies a small assessment fee on oil and gas produced in California, and the Census Bureau records this as severance tax revenue.
Alaska typically depends on severance tax revenue more than any other state. However, the price and production of oil was low in 2017, and thus so was its tax revenue. In 2014, the state collected $2.5 billion in severance tax revenue, which was 18 percent of its state and local general revenue. In 2012, severance tax revenue accounted for a third of Alaska’s general revenue. However, in 2017, Alaska collected only $585 million in severance taxes, or 5 percent of its general 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) (2014)
What Falling Oil Prices Will Mean for State Budgets
Norton Francis (2014)