Severance tax collections evolve in stages that depend upon price, the amount of mineral left in the ground, and the shape of a state’s finances.
In America, severance taxes began in Texas in 1905, then re-appeared Michigan and Louisiana in the 1920s. The more entrenched the oil or coal industry in a state, the greater the influence over taxation.
The first stage is no severance tax at all, as in Pennsylvania, (see below). The opposite is Texas, which began collecting severance taxes four years after the drilling of the 100,000-barrel a day Spindletop gusher near Beaumont.
The second stage levies a percentage on volume, i.e., tons and or barrels. Few, if any, states or nations today rely solely on a volume-based severance tax.
The third stage is where most states are now: a tax that takes a percentage of the value of the oil, gas, or coal produced. The higher the value of oil or gas, the higher the revenue for the state.
The fourth stage, what Alaska just did, involves a value-based tax, but also subscribes to a sliding scale. The higher the price of the mineral, the higher the severance tax. The method is not new. This progressive formula has been used by Utah since 1990.
In 1953, West Virginia’s new governor, William Marland, announced he wanted to help his impoverished state by enacting a ten cents per ton severance tax on coal, a twenty-five cents per barrel tax on oil, and a one-cent per thousand cubic feet tax on natural gas.
The announcement was a “bombshell,” according to historian Paul F. Lutz. The legislature “witnessed a political donnybrook reminiscent of West Virginia’s legendary Hatfield and McCoy feud,” wrote Lutz in his 1978 article, Governor Marland’s Political Suicide: The Severance Tax, published in West Virginia History.
The Charleston Gazette, whose editorial board included Carl Andrews, secretary of the West Virginia Coal Operators Association, attacked Marland’s severance tax and declared it “would destroy the coal industry of West Virginia.”
The measure failed and the state had to wait 34 more years before finally passing a severance tax. Meanwhile, West Virginia remained one of the poorest states in the nation.
Pennsylvania, home to Edwin Drake’s 1859 oil well, was responsible for half the world’s oil production until the discovery of oil at Spindletop. The Energy Information Agency credits Pennsylvania with the fourth-largest coal reserves in the nation.
Pennsylvania has no severance tax of any kind.
Patrick Henderson, executive director of the Pennsylvania senate’s Environmental Resources & Energy Committee, says that to his knowledge, there’s never been an attempt to put a severance tax on coal.
“I think long ago lawmakers decided they wanted to encourage this industry, not tax it to death,” he said.
However, with the Marcellus shale natural gas field being the possible next big play, Henderson said talk of a severance tax now floats around the halls of Harrisburg.
“We’ll see,” he said. “With the state facing a $1 to 2 billion shortfall, we’re expecting the governor to come up with some suggestions on how to raise revenue.”
California produces more crude oil than Wyoming, Oklahoma, and New Mexico combined. It has no severance or production tax on oil. Legislation has failed twice.