State severance tax revenues decline as fossil fuel prices drop

Texas tax revenue from natural gas (48%) and oil (51%) were down significantly in 2015

Several states that collect significant revenue from severance taxes on fossil fuel extraction are re-evaluating current and upcoming operating budgets and taxation structures to address revenue shortfalls, according to the US Energy Information Administration.

Source: Department of Commerce, U.S. Census Bureau, Quarterly Summary of State and Local Taxes

Severance taxes are often imposed on the extraction of nonrenewable resources such as crude oil, natural gas, and coal.

Lower fossil fuel prices, and in some cases, lower production, have led to lower severance tax receipts than were expected when revenue estimates were developed.

Six states strongly affected by this budget squeeze are Alaska, Texas, North Dakota, Wyoming, Oklahoma, and West Virginia.

Texas: The comptroller of Texas reports that as of Nov. 2015, revenues from natural gas production and oil production and regulation were down 48 per cent and 51 per cent, respectively, from a year ago.

Texas’s economy is more diversified than that of other major oil-producing states, and severance taxes account for a lower per cent of its tax total receipts (11 per cent in 2014), meaning Texas can likely respond to the lower severance tax receipts without drastic changes to its enacted 2016 budget.

Alaska: Alaska’s severance tax revenue has fallen further and faster than other states because its tax is based on the operators’ net income rather than on the value or volume of oil extracted. In 2015, when average net incomes after operating and capital expenses were near zero, the state derived practically no revenue from this tax, versus more than $5 billion in 2012. Based on 2014 data, severance taxes accounted for about 72 per cent of the state’s tax revenue. Given the sharp decline in severance tax revenues, the governor recently proposed a 6 per cent state income tax as well as scaling back the payout of dividends to residents from Alaska’s Permanent Fund.

North Dakota: Despite oil production volumes remaining largely flat throughout 2015, total severance tax revenues fell from more than $3.5 billion in 2014 to $2 billion in 2015 as oil prices declined. The state’s general fund budget collections from July through Nov. 2015, the first five months of the 2015-17 two-year budgeting period, were $152 million, which was 8.9 per cent below the budgetary forecast. The below-budget revenue was attributed to weaker sales tax collections, which are in part driven by oil exploration and production in the Bakken region. If projected revenue remains 97.5 per cent or less of the budgeted amount, across-the-board spending reductions would be imposed for most state agencies.

Source: Department of Commerce, U.S. Census Bureau, Quarterly Summary of State and Local Taxes Note: In Wyoming, revenue collections for the production year are due in February, and third quarter payments are not required.

Wyoming: Mineral severance taxes from oil, natural gas, and coal production, along with associated federal mineral royalties, are the primary revenue sources for Wyoming. Severance taxes alone accounted for 39 per cent of the state’s receipts in 2014. However, despite recent increases in oil production, Wyoming is seeing lower revenue projections in response to lower oil prices and declining natural gas and coal production. In Oct. 2015, the state revised its 2015-18 severance tax projections downward by nearly $160 million from Jan. 2015 projections.

Oklahoma: Although severance taxes accounted for 8 per cent of Oklahoma’s revenue collections in 2014, collections from state sales taxes and individual and corporate income taxes are also significantly affected by oil and natural gas prices. The state faces a fiscal year 2017 budget deficit of $900 million on a general fund budget of nearly $7 billion. In Dec. 2015 the state declared a revenue failure, which requires state agencies to reduce spending, and allows for use up to 37.5 per cent of the state’s budget stabilization fund.

West Virginia: Severance taxes accounted for 13 per cent of West Virginia’s tax revenues in 2014. Falling coal production and low natural gas prices in the third quarter of 2015 resulted in the lowest total tax collection since 2008, mostly as a result of decreased severance tax receipts, helping create a projected fiscal year 2016 budget deficit of more than $250 million. West Virginia’s coal production in 2015 was down more than 15 per cent from 2014. Lower natural gas prices have more than offset an increase in the state’s natural gas production, resulting in lower natural gas severance tax receipts. In Oct. 2015, the governor announced 4 per cent reductions to budgets for most state agencies.