June 21, 2016

A Brief Overview of State Severance Taxes

Severance taxes are taxes imposed on natural resources removed from the soil or water.  They are usually associated with oil, natural gas, coal, and ores, but can also be applied to other natural resources including salt, timber, fish, phosphates, sulfur, clay, sand, gravel, and cement compounds.  The revenues from these taxes are “intended to compensate a state and its citizens for depletion of their natural resource wealth, and to mitigate social and environmental effects” (National Conference of State Legislatures (NCSL), Tax Policy Handbook for State Legislators, Third Edition, February 2010).

The taxes are based on either the value of the resource extracted or produced or the production volume.  The value-based taxes are imposed as a fixed percentage of the value, while the volume-based taxes are imposed as a flat rate per unit of measure.  In either case, the tax rates are often graduated. 

This table from the Council of State Governments’ The Book of States 2015 lists the 39 states that impose at least one severance tax and generally provides the rate and basis for each tax.

Connecticut is among the 11 states that do not impose a severance tax.  The other states are Delaware, Georgia, Hawaii, Iowa, Massachusetts, Missouri, New Jersey, New York, Rhode Island, and Vermont.