State Severance Taxes on the Rise?

In these tough economic times where many are struggling for cash, states are not an exception. In order to aid them in meeting budgetary goals, some states are proposing the idea of imposing new oil and gas levies.

Pennsylvania and California are proposing increased severance taxes on oil and natural gas production in their states (5% and 9.9% proposed severance tax, respectively). Arkansas passed, and now has in effect, a tax increase on oil and gas production. Companies in these states warn that the new tax levies could lead to lost jobs and higher energy prices as they decide to relocate their business elsewhere.

Some states, such as Colorado and Montana, have already attempted to pass legislation to increase these taxes, but the bills have died in their state legislature due to “vote no” campaigns funded by the industry.  Although there is obviously significant opposition to the higher taxes, some industry insiders point out that the higher taxes may not greatly impact a company’s drilling locations. For instance, Alaska (which has the highest severance tax rate at 25%) has not seen a reduction in drilling activity.

As companies make decisions on where to drill, they should keep an eye on the relevant state legislature as rising severance taxes may impact the economic viability of their projects.