States and regions looking to attract energy intensive industries need a multi-pronged approach to tax policy. This tax policy needs to accomplish three complex tasks:
- promote energy industry investments in drilling, distribution and processing facilities needed to produce low-cost energy resources
- provide for needed infrastructure investments in primarily rural markets that typically are the site of most energy developments
- retention and recruitment of heavy manufacturers dependent on the cost of energy more so than other industries
Most debate among policy makers related to energy tax policy centers on how to tax the energy companies themselves. This focus on how energy companies are taxed impacts the attraction of high-wage energy intensive company jobs because without the initial drilling, transmission and processing investment by the oil industry—there is no oil or natural gas or wind or solar power to use.
For the oil and natural gas industry, the rate of the severance tax is the “hot” political topic. Ohio is among many states considering an expansion of their oil and gas severance taxes. Governor John Kasich is pushing for a severance tax expansion. An Ohio General Assembly working group suggested a market-based “trigger” or slow phase-in of a tax increase depending on economic trends with an eye toward maintaining growth in the industry and also recommends uses of any potential revenue gains, such as assisting local governments with infrastructure needs and lowering income taxes. However, the Ohio General Assembly working group failed to recommend a specific severance tax rate increase and Governor Kasich is not satisfied with the result. Focusing on only the severance tax is a common mistake for states looking for energy company investments. Energy companies are also impacted by the overall state business tax system. As an example, while Texas has a relatively high severance tax that is the state’s second largest revenue source, Texas also has no income tax at the local or state level and the Lone Star State does not apply the severance tax until the well is a money maker.
Eight State Comparison of Severance Tax Rates, Bases and Incentives
|State||Severance Tax Rates & Bases||Incentives|
|Arkansas||5% of the market value of the oil at the point of severance and the owner of a well that produces fewer than ten barrels of oil per day pays a reduced 4% rate on oil from that well with separate levies totaling 2.05¢ per barrel of oil are levied for the benefit of the Arkansas Museum of Natural Resources||Deduct costs incurred dehydrating, treating, compressing, and delivering natural gas, an oil or gas well that disposes of salt brine produced in the production of the oil or gas by means of an approved underground saltwater disposal system is allowed a severance tax credit equal to the operator’s costs in maintaining the underground disposal system, up to $370,000|
|Colorado||Basis of gross income attributable to the sale of oil and gas depending upon the producer’s annual gross income and ranges from 2% (annual gross income under $25,000) to 5% (annual gross income of $300,000 and over) plus an additional charge on the market value of oil and gas produced at the wellhead to fund enforcement actions not to exceed 1.7 mills||Authorizes a credit against the severance tax equal to 87.5% of ad valorem tax, i.e., property tax, assessed or paid by leasehold and royalty interests|
|Louisiana||Levies a severance tax on oil and condensate equals 12.5% of “gross value” which is the greater of (1) the gross receipts received from the first purchaser, less charges for trucking, barging, and pipeline fees, and (2) the posted field price and a tax on natural gas solids and liquids are levied at a rate of 15.8¢ per Mcf of gas, which results from applying a gas price index adjustment to a base minimum rate of 7¢.56||Production of oil or natural gas from a horizontal well is exempt from the tax for the earlier of the first two years of the well’s production or the date that “payout” of the well is achieved, i.e., the date a sufficient quantity of oil or natural gas, based on market prices, is obtained to recover the producer’s costs of drilling the well and is reduced and eventually eliminated if the price of oil or natural gas increases to certain thresholds|
|North Dakota||Levies a gross production tax on oil which equals 5% of the gross value of the oil at the wellhead and an oil extraction tax which is currently 6.5% of the gross value of oil at the wellhead. Beginning in 2016, the oil extraction tax rate becomes 5% of the gross value of oil, unless the price of oil exceeds $90 per barrel plus an inflation factor, in which case the rate will increase to 6%||If the price of oil dips below a trigger price, currently $52.59 per barrel, a 4% reduced rate applies, and, until July 1, 2015, if the oil price exceeded the trigger price, the first 75,000 barrels or first $4.5 million of gross value of oil from a horizontal well was subject to a reduced 2% rate
|Oklahoma||Levies a gross production tax on oil and gas for wells producing on or after July 1, 2015 of 2% on the gross value of severed oil and gas for the first three years of a well’s production, with a 7% rate applying thereafter, and, if the sale price of the oil or gas does not reflect the prevailing price for similar gas or oil, the Oklahoma Tax Commission may require the producer to pay the tax on the basis of the prevailing price of oil or gas from the same field and if the sale is between related entities and not done at arm’s length, then gross value equals the prevailing price of oil and gas produced in the county, as calculated by the Commission. A petroleum excise tax equal to 0.095% of the gross value of severed natural gas and oil is charged with rate decrease of 0.085% scheduled for July 1, 2016||Oklahoma allows gas producers to deduct their marketing costs associated with moving the gas from a well to market from the gross production tax base, and, for wells producing on or after July 1, 2015, Oklahoma imposes a 2% rate on the gross value of severed oil and gas for the first three years of a well’s production|
|Ohio||A general severance tax is imposed at 10¢ per barrel of oil and 2.5¢ per 1,000 cubic feet (Mcf) of natural gas, and the cost recovery assessment is imposed at 10¢ per barrel of oil and 0.5¢ per Mcf of natural gas|
|Texas||Levies a severance tax on oil and condensate (“oil production tax”) equal to the greater of 4.6% of the market value of oil or condensate or 4.6¢ for each barrel of oil or condensate produced, imposes a regulatory oilfield clean-up fee of 0.675¢ per barrel of oil produced. a severance tax on gas and all liquid hydrocarbons that are not condensate (“gas production tax”) equals 7.5% of the market value of gas or liquids produced..72, and an oilfield clean-up fee of 1/15 of 1¢ per Mcf of gas produced||The market value of gas is reduced by costs incurred by the producer to compress, dehydrate, sweeten, or deliver the gas, for the gas production tax, Texas offers a temporary rate reduction for wells extracting gas designated by the Texas Railroad Commission or the Federal Energy Regulatory Commission as a high-cost gas, which currently includes gas produced from shale formations, the reduction is calculated by subtracting from the 7.5% rate the product of that rate times the ratio of drilling and completion costs incurred for the well to twice the median drilling and completion costs for high-cost wells completed during the preceding fiscal year, but the rate may not be reduced below zero, the reduced rate applies for the lesser of ten years beginning on the first day of production, or until the cumulative value of the tax reduction equals 50% of the drilling and completion costs incurred for the well.|
|West Virginia||Levies a severance tax on oil and natural gas at a rate of 5% of the gross value of the natural gas or oil with the gross value of natural gas and oil equals the product’s local market value, with deduction for processing costs necessary to obtain commercially marketable or usable oil or gas and an additional tax on natural gas in the amount of 47¢ per Mcf for the purpose of reducing the state’s Workers’ Compensation debt.||Provides an annual credit of $500 for each severance taxpayer and exempts natural gas and oil extracted from low-producing wells.|
Again, these taxes in energy rich states are not the only tax energy companies pay but they illustrates approaches multiple states have taken in this area.