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State Severance Tax Revenues from Fossil Fuels Drop

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The U.S. Energy Information Administration (EIA) reported that the revenues of several states from severance tax on fossil fuels declined as energy prices continue to fall.

According to the agency, several states are re-evaluating their current and upcoming operating budgets and taxation structures to address revenue short falls from severance taxes on fossil fuels.

States affected by declining fossil fuel prices

State implements severance taxes on the extraction of fossil fuels or non-renewable energy resources such as crude oil, natural gas, and coal.

Today, the WTI crude dropped 3.85% to $30.20 per barrel; the Brent crude declined 3.07% to $30.58 per barrel, and the natural gas fell 5.47% to $2.27 per MMBtu. Big banks predicted that oil prices will fall to as low as $20 per barrel.

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

The agency noted that six states including Alaska, Texas, North Dakota, Wyoming, Oklahoma, and Virginia were experiencing heavy budget squeezes because of the declining severance tax revenues from fossil fuels.

Alaska severance tax revenue is falling faster than other states

According to the EIA, Alaska’s severance tax revenue is falling quicker and further than the other states. The agency explained that Alaska’s tax is based on the net income of operators instead on the value or volume of extracted oil.

Last year, Alaska practically had no severance tax revenue from fossil fuels when the average net incomes (after operating and capital expenses) reported by operators was almost zero.

Severance taxes accounted 72% of the Alaska’s tax revenue based on a 2014 data. The state collected more than $5 billion in severance taxes.

In Texas, the state comptroller reported that the revenues from natural gas production and oil production declined 48% and 51%, respectively.

Based on a 2014 data, severance taxes account 11% of the state’s revenue. The state can withstand lower severance tax receipts without implementing drastic changes to its 2016 budget.

North Dakota’s oil production volumes remained flat last year. The states severance tax revenues declined to $2 billion from $3.5 billion in 2014. The state’s general fund budget collections from July to November 2015 were $152 million, 8.9% lower than its budget forecast.

Wyoming obtains its revenue primarily from severance taxes on fossil fuels production and associated federal mineral royalties. Severance taxes accounted 39% of the state’s revenues in 2014.

The state is expecting lower revenue due to the declining prices of oil and natural gas and coal production. Wyoming lowered its 2015 to 2018 severance tax estimate by almost $160 million.

In Oklahoma, severance taxes accounted 8% of its total revenue collections in 2014. The plunging oil and natural gas prices also affected the states revenue collection from sales taxes as well as individual and corporate income taxes. The state is facing a $900 million budget deficit for fiscal 2017. Last year, Oklahoma declared a revenue failure.

Meanwhile, West Virginia’s severance taxes accounted 13% of its tax revenues in 2014. The state recorded the lowest total tax collection (since 2008) due to the plummeting coal production and low natural gas prices in the third quarter last year. West Virginia projected more than $250 million budget deficit for fiscal 2016.

Severance Tax on Fossil Fuels 2

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