State Revenues and the Natural Gas Boom An Assessment of State Oil and Gas Production Taxes

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1 State Revenues and the Natural Gas Boom An Assessment of State es By Cassarah Brown June 2013 Taxes on Production As technological developments increase access to natural gas reserves across the country, states are exploring ways to benefit from these newly accessible resources and to ensure that communities are reimbursed for the impact that natural gas development may have on infrastructure. A primary approach has been to impose taxes and fees on the extraction, production, and sale of natural gas and oil. These severance taxes taxes applied to materials severed from the ground tax the extraction or production of oil, gas, and other natural resources. Thirty two states 1 currently produce natural gas, with Texas, Louisiana, Wyoming, Oklahoma, and Colorado ranking as the top five producers 2 in Maryland, New York, and Pennsylvania are the only natural gas producers without a severance tax. Thirty four states have enacted fees or taxes on oil and gas production and three of these North Carolina, Idaho, and Wisconsin have taxes on oil and gas production despite lacking commercial gas and oil wells. Ways to Tax Production States differ in how to impose taxes on oil and gas, generally taxing a fraction of the market value, the volume produced, or some combination of the two. Further, most states have enacted tax incentives, credits, and exemptions to encourage production from certain well types or to encourage producers to donate money to support areas like education. Many states impose oil and gas conservation fees, levies or assessments in addition to or instead of a traditional production or severance tax. These fees and assessments also tax the volume or value of the oil and gas produced. Taxing the Volume of Produced Several states tax the volume of oil or gas produced, most often per barrel of oil or per one thousand cubic feet of natural gas. While simple to implement, these taxes do not reflect price fluctuations. Gas and oil conservation fees and assessments commonly tax the volume produced with a relatively low flat rate, often adjusted annually. For example, Arkansas places a value tax on gas and oil through its severance tax, but it places a relatively modest fee per volume of oil and gas produced for its oil and gas assessment. Volume taxes are often designed to be more easily adjustable than value taxes through these adjustments, they can adapt to the changing market value of gas and oil. Value Taxes on Production States most often tax the value of produced oil and gas. For example, Texas and Wyoming tax the assessed oil and gas value with reduced rates and exemptions to incentivize production from certain well types. These taxes are applied at the point of production, before accounting for transportation and distribution costs. Value taxes can be difficult to implement because states must closely monitor gas and oil sales to determine the current market value. Further, because prices are prone to fluctuation, value taxes can make state revenue predictions difficult. Two states Colorado and Illinois tax the gross income from produced oil and gas, rather than calculate the monthly market value. While Illinois has a flat rate, Colorado uses a tiered system. Value-Volume Taxes on Production Many states with severance taxes incorporate both the volume of oil and gas produced and the oil and gas market value, or apply separate taxes to the volume and value. For example, Montana adjusts its tax rate on production value based on the volumes of oil or gas a well produces, in addition to the age and classification of the well. Other states, such as Oklahoma, adjust their tax rate on gross production value based on the current value of gas. Such approaches aim to increase a state s severance tax income when the oil and gas industries N a t i o N a l C o N f e r e N C e o f S t a t e l e g i S l a t u r e S

2 State Revenues and the Natural Gas Boom: An Assessment of State es are thriving and reduce state pressure when the industry lags. Controversy Surrounding es While the natural gas market is thriving, so too are debates over severance taxes. Because approaches vary, it is difficult to directly compare states severance tax revenue potential. For example, while West Virginia applies a 5 percent flat tax on gross oil and gas production, it has exemptions for low producing oil and gas wells. Many states, including Mississippi, apply tax exemptions and incentives to high cost gas wells, inactive wells and discovery wells, to help encourage production. States also provide tax credits to offset local taxes on oil and gas. Since methods to determine marketable value may vary per state, tax rates on the market value of oil and gas are difficult compare. Pennsylvania and Ohio offer interesting examples of the controversy surrounding severance tax rates and their enactment. Pennsylvania: Impact Fee versus Pennsylvania is the largest US natural gas producer that does not impose a severance tax. Instead, it levies an impact fee on every producing gas and oil well in the state, regardless of the volume produced. Severance tax opponents 3 argue that a tax would deter gas production and that estimates of missed revenue are wrong because they do not account for tax exemptions and reductions that would likely be applied if Pennsylvania enacted a severance tax. However, studies 4 by the Pennsylvania Budget and Policy Center estimate that the impact fee will generate $237 to $261 million by 2015, compared to an estimated $800 million from a 5 percent tax on production value. The 5 percent tax is based on proposals by Pennsylvania Governor Edward Rendell and is modeled on West Virginia s severance tax. Ohio: Pushback Against Governor s Proposed Increase Severance taxes have faced resistance from other states, legislators, and industry groups that oppose amendments to increase severance tax rates. Ohio Governor John Kasich proposed a controversial severance tax increase in his budget 5 to offset a proposed income tax rate decrease. Kasich s budget proposal, which estimates the state would accrue $45 million in 2014 and $155 million in 2015 from the tax, would set the severance tax on natural gas to 1 percent of produc- tion value while natural gas liquids, oil, and condensate would be taxed at 4 percent of production value. Opponents of the tax 6 fear it would deter growth by hurting investment in Ohio s Utica shale, a shale region with high natural gas and oil production potential. States with es and Pending Legislation Figure 1 shows states with taxes and fees on oil and gas production and states with active legislation that aim to change the current severance tax rate or the severance tax revenue allocation. Figure 1. Taxes or Fees on Production and Recent Legislation Existing tax or fee on oil and gas production Pending legislation to propose new tax or fee Pending legislation to amend tax or tax revenue allocation Source: NCSL, Distribution of Tax Revenues from Taxes and Fees on Production Severance and production taxes 7 produce a relatively small portion of most states revenue. Alaska and North Dakota, however, saw severance tax revenues help drive their tax revenues to increase by 47 percent and 27.3 percent, respectively, between 2011 and Appendix A shows taxes and fees on oil and gas production per state and indicates the tax revenue allocations. Tax exemptions for gas used in the production of oil or gas, gas lost in production, and gas lawfully vented or flared are not noted. Most states with taxes on oil and gas production deposit at least a portion of their tax revenues toward the state s general. Although these s may differ across states, general s are usually unobligated revenues used for discretionary state spending. National Conference of State Legislatures 2

3 State Revenues and the Natural Gas Boom: An Assessment of State es Fees, Assessments, and Taxes Oil and gas conservation fees are not classified by states as severance taxes. These fees typically levy a small tax based on oil and gas value or production volume. Such revenues most often feed s to help pay for the state s commission, or equivalent, and help cover expenses related to the administration of oil and gas regulations, well licensing, and road maintenance. These fees are often subject to annual adjustments, as with California s Oil and Production Assessment. Twelve states have some sort of oil and gas assessment or conservation tax in addition to a larger tax on oil and gas production. Idaho has one of the highest conservation tax rates, but dedicates 40 percent of tax revenues to oil and gas producing counties and cities, public schools, and local economic development s. extracted and subject to the severance tax may apply for assistance from the. While many states allocate s to local governments, they vary in the control given to municipalities over the use of s. Rather than a state-administered severance tax, Virginia authorizes county and city governments to impose severance taxes but legislates the maximum tax rates and dictates the s to which the tax revenues may be credited. Figure 3 shows states with severance taxes that allocate revenues directly to city or county governments. Figure 3. Revenue Allocation to Counties and Local Governments Figure 2 shows states with severance taxes that allocate revenues to their state s general or towards oil and gas development, conservation or related activities. Figure 2. Revenue Allocation to General and Development and Regulation Existing tax or fee on oil and gas production Portion of revenue directly allocated to local governments Portion of revenue directly allocated to oilor gas-producing local governments Source: NCSL, Existing tax or fee on oil and gas production Portion of revenue directly allocated to state general Portion of revenue allocated for oil and gas regulation, development, conservation and related activities Source: NCSL, Revenue Allocations to Counties and Local Governments Many states redistribute tax revenues to assist local governments, especially oil- and gas-producing municipalities. After depositing 90 percent of revenues to the state general, West Virginia allocates 75 percent of remaining revenues to oil- and gas-producing counties and the rest to all counties, based on population density. No producing county may receive less than a non-producing county. Kentucky deposits half of its severance tax revenues to its Local Governmental and Assistance. Local governments in areas where minerals are Revenue Allocations for Education and Transportation-Related Expenses A growing number of states earmark a portion of severance tax revenues for transportation or education related expenses. Ninety-five percent of Arkansas severance tax revenue is distributed according to its Highway Distribution Law. Kansas currently allocates surplus revenues (i.e. revenues above monthly estimates) to several education s. California s proposed severance tax (CA SB 241-pending) would allocate 90 percent of revenues towards higher education. Alaska provides tax credits to oil and gas producers that donate to Alaskan universities, rather than allocating revenue directly to education. Figure 4 shows states with severance taxes that directly allocate s for transportation or education related expenses. National Conference of State Legislatures 3

4 State Revenues and the Natural Gas Boom: An Assessment of State es Figure 4. Revenue Allocation for School and Transportation-Related Purposes Existing tax or fee on oil and gas production Portion of revenue directly allocated for transportation-related expenditures Portion of revenue directly allocated for school or educationrelated expenditures Source: NCSL, Appendix B shows pending and recently enacted legislation per state related to severance tax rates and severance tax revenue distribution. Conclusion As the oil and gas industries continue to thrive, states are trying to create severance taxes that provide fair economic benefits for the state while promoting resource development. As states increasingly compete to attract oil and gas producers, balancing these goals is proving a delicate process. While local communities will likely remain the primary recipients of earmarked severance tax revenues, more states are looking at using the increasing revenues to meet education, transportation and other needs. National Conference of State Legislatures 4

5 State Revenues and the Natural Gas Boom: An Assessment of State es Appendix A. Taxes on the Production and Severance of and Tax Revenue Allocation State Tax Type Tax Description Revenue Allocation Alabama Alaska Arizona Arkansas Privilege Tax Transaction Privilege, Use and Severance Tax Natural Gas Severance tax 2% of gross value of gas or oil at point of production Exceptions: o 1% of gross value for 5 years from first production for wells permitted 7/1/96 through 6/20/02 o 1.66% of gross proceeds from offshore production at depths greater than 8,000 feet below mean sea level 8% of gross value of gas or oil at point of production Exceptions: o 6% offshore wells producing more than 200 MCF per day at depths less than 8,000 feet and wells permitted after 7/01/88 o 4% offshore wells producing 200 MCF or 25 BBLs or less per day at depths less than 8,000 feet. Oil wells producing 25 BBLs or less per day. Gas wells producing 200 MCF or less per day. o 3.65% of proceeds from offshore production from depths greater than 8,000 feet below mean sea level 25% of production value (base rate) Additional tax added: o 0.4% progressive tax added for each additional dollar of production tax value if monthly production value more than $30 but less than $92.50 per equivalent barrel of oil or gas o Progressive tax rate added equal to 0.1% of the difference between the average monthly production tax value and $92.50, if monthly production value is greater than $92.50 Maximum tax rate is 75% of production value Several credits and exemptions available to incentivize well exploration and university donations. Rate changes to 35% of production value in 2014 with no additional progressive tax 3.125% on oil and gas production o 1% for distribution base o 2.125% for non-shared base Tax on market value of natural gas produced: o 1.5% for new discovery gas, 24 months from date of first production o 1.5% for high-cost gas, 36 months from date of first production, 12-month extension possible o 1.25% for marginal gas o 5% on natural gas not defined as new discovery or marginal gas o 5% on high-cost gas following cost recovery period Revenues credited to the state general to defray costs associated with the conservation and regulation of oil and gas production Submerged lands: o 90% to state general 10% to oil or gas producing county Non-submerged lands: o 25% to state general o Of remaining 75%: 66-2/3% to state general and oil or gas producing county (via formula) 16-2/3% to oil or gas producing county 16 2/3% Revenue received due to assessment or litigation deposited in Constitutional Budget Reserve Remaining revenue deposited in state general Distribution portion: o 25% to municipalities o 40.51% to counties o 34.49% to state general Non-shared portion deposited into state general 5% of revenues deposited into state general 95% of revenues deposited as special revenues distributed according to Arkansas Highway Distribution Law Oil Excise Tax Assessment Tax on market value at time of severance: o 4% of the market value when production averages 10 barrels or less per well per day o 5% of the market value when production averages more than 10 barrels per well per day Up to 50 mills per barrel of crude oil or petroleum used or marketed Up to 10 mills per MCF of natural gas produced and saved each month 3% of revenues deposited into General Revenue Account Of remaining 97%: o 75% to State Treasury o 25% to County Aid Revenues credited to pay for costs associated with oil and gas conservation administration National Conference of State Legislatures 5

6 State Revenues and the Natural Gas Boom: An Assessment of State es Appendix A. Taxes on the Production and Severance of and Tax Revenue Allocation State Tax Type Tax Description Revenue Allocation California Production Assessment $ on each barrel of oil and 10,000 cubic feet of natural gas produced. Rate established annually each June. Ad valorem taxes administered by county Assessment supports the Department of s Division of Oil, Gas and Geothermal Resources Colorado Levied on the gross income from crude oil, natural gas, and oil and gas based on gross income: o 2% if income less than $25,000 o $500 plus 3% of the excess over $24,999 for income $25,000-$99,999 o $2,750 plus 4% of the excess over $99,999 for income $100,000-$299,999 o $10,750 plus 5% of the excess over $299,999 for income over $300,000 o 4% tax on oil shale gross proceeds Oil produced from any well that produces 15 barrels per day or less of oil, and gas produced from wells that produce 90,000 cubic feet or less of gas per day exempt For oil and gas, tax revenues deposited in the state general o $1.5 million transferred into the innovative energy o Of remaining revenues 50% credited to the state severance tax trust 50% credited to the local government severance tax For oil shale: o 40% of revenues deposited in state general o 40% of revenues deposited in state severance tax trust o 20% of revenues deposited in local government severance tax Florida Idaho Illinois Ad Valorem tax Levy Oil, Gas and Sulfur Tax Production Assessment Rates vary by county Severance tax can be reduced to credit 87.5% of ad valorem taxes Maximum $ of market value at wellhead Oil Rates (on gross value of oil): o 12.5% on escaped oil o 8% on ordinary oil production o 5% on small well oil o Tertiary oil based on tiered formula $0.345 per MCF for gas (rate adjusted annually) 2.5% of market value of gas and oil 0.1% of gross revenue of oil and gas from each well in production Revenues go directly to Colorado local governments Revenues deposited in the Environmental Response may not to exceed $4,000,000 After res distributed: o Revenues deposited in the Tax Trust and distributed to: General revenue of state General revenue of board of county commissioners of oil or gas producing county Mineral Trust o Distribution to s based on gas and oil rate classification After res distributed: o 60% into o 40% to state tax commission: 28% to oil or gas producing county 28% to cities from oil or gas producing county 28% to the public school income 16% to the local economic development account After res distributed, revenues go to Illinois Petroleum Resources Board National Conference of State Legislatures 6

7 State Revenues and the Natural Gas Boom: An Assessment of State es Appendix A. Taxes on the Production and Severance of and Tax Revenue Allocation State Tax Type Tax Description Revenue Allocation Indiana Kansas Kentucky Louisiana Severance and Petroleum Mineral Fee Natural Resources Severance and Processing Tax Natural Resources Beginning July 1, % tax on value of oil or gas severed during first 24 months of well production 6% value of gas severed Oil (tax on value): o 3% for wells producing less than 25 barrels per day o 4% for wells producing 25 or more but less than 50 barrels per day o 5% for wells producing 50 or more but less than 100 barrels per day o 6% for wells producing 100 or more barrels per day o Wells producing 15 or less barrels per day exempt o Tax rate reduced by 0.25% for wells at least 50% of workforce hours performed by Illinois construction workers Tax at a rate equal to the greater of: o 1% of the value of petroleum o $0.03 per MCF for natural gas o $0.24 per barrel of oil $1 per ton of coal 8% on gross value of oil or gas Exemptions for gas wells with gross value less than or equal to $87 per day Exemptions for low-producing oil wells Oil: 91 mills per barrel Gas: 12.9 mills per MCF 4.5% of gross value of natural gas and other resources, except coal Tax credit of 4.5% of gross value available for natural gas severed from a recovered inactive well Gas (per MCF): o Full Rate ( 7/1/12 to 6/30/13): $0.148 o Incapable oil-well gas: $0.03 o Incapable gas-well gas: $0.013 o Produced water-full rate (7/1/12 to 6/30/13): $0.118 o Produced water-incapable oil-well gas: $0.024 o Produced water-incapable gas-well gas : $ Oil (percent of value): o Full rate oil/condensate 12.5 o Incapable oil rate 6.25 o Stripper oil rate: o Reclaimed oil: o Produced water-full rate: 10.0 o Produced water-incapable oil rate: 5.0 o Produced water-stripper oil rate: 2.5 Severance taxes on new discovery oil and natural gas wells suspended 24 months or until payout of well Revenues deposited in the General Revenue Revenues deposited in the Money for res distributed into mineral production tax re. Of remaining revenues: o 7% deposited in the special county mineral production tax o Remaining revenues deposited in general state. However, if monthly revenue is greater than that forecast: 14.63% of surplus is deposited in the incentive for technical education.; amount deposited not to exceed $1,500, % of surplus is deposited in the technical education ; amount deposited not to exceed $8,750,000 Revenues deposited in the Fee 50% deposited in Local Government Economic Assistance 50% deposited in state general. 20% severance tax revenues, up to $500,000, allocated to producing parish Remaining s, up to base level determined by revenue estimates, allocated to Bond Security and Redemption Revenues exceeding base level: o 50% allocated to Louisiana Investment for Enhancement o 50% to state general National Conference of State Legislatures 7

8 State Revenues and the Natural Gas Boom: An Assessment of State es Appendix A. Taxes on the Production and Severance of and Tax Revenue Allocation State Tax Type Tax Description Revenue Allocation Michigan Mississippi Montana Oil Field Restoration Fee Privilege Tax Natural Gas and Oil $0.015 for every barrel of oil and condensate produced $0.003 for every MCF of gas produced 5% of the gross market value of gas 6.6% of the gross market value of oil 4% of the gross market value for stripper well crude oil 6% of production value for oil and gas at point of production 3% of production value for oil produced by enhanced oil recovery method Tax exemptions and reduced rates for oil or gas produced from discovery wells, development wells, and 2-year inactive wells Gas rates (percent of gross production value), working interest: o First 12 months of qualifying production: 0.5% o After 12 months: Pre-1999 wells: 14.8% Post-1999 wells: 9% o Stripper natural gas pre-1999 wells: 11% o Horizontally completed well production: First 18 months of qualifying production: 0.5% After 18 months: 9% Oil rates (percent of gross production value), working interest: o Primary recovery production: First 12 months of qualifying production: 0.5% After 12 months: Pre-1999 wells: 12.5% Post-1999 wells: 9% o Stripper oil production: First 1 through 10 barrels a day production: 5.5% More than 10 barrels a day production: 9% Stripper well exemption production: 0.5% Stripper well bonus production: 6% o Horizontally completed well production: First 18 months: 5.5% After 18 months: Pre-1999 wells: 12.5% Post-1999 wells: 9% Revenues deposited in oilfield site restoration 2% of revenue, a minimum of $1,000,000, deposited in the orphan well. Amount in may not exceed $3,000,000. Remaining revenue deposited in the state general o General revenue greater than $16,000,000 allocated for the payment of heating fuel costs credits Gas Revenues: o 66-2/3% of revenues allocated to the state and 33-1/3% to the producing county Oil Revenues: o First $600,000: 66-2/3% to the state and 33-1/3% to the producing county o Next $600,000: 80% to state and 20% to producing county o Over $1,200,000: 85% to state and 15% to producing county Revenues allocated to counties in varying amounts Of remaining revenues: o 2.16% deposited in the natural resources projects state special revenue account o 2.02% deposited in the natural resources operations state special revenue account o 2.95% deposited in the orphan share account o 2.65% deposited in the state special revenue to be appropriated to the Montana university system o All remaining revenues deposited in the state general Privilege and License Tax Non-working interest: oil and gas wells subject to 14.8% tax Not more than 0.3% of market value per barrel of oil or 10,000 cubic feet of natural gas produced, saved, marketed, or stored Revenues credited to special revenue account for oil and gas board expenses National Conference of State Legislatures 8

9 State Revenues and the Natural Gas Boom: An Assessment of State es Appendix A. Taxes on the Production and Severance of and Tax Revenue Allocation State Tax Type Tax Description Revenue Allocation Nebraska Nevada New Hampshire New Mexico North Carolina Tax Fee Refined Petroleum Products Tax Tax Emergency School Tax Ad Valorem Natural Gas Processor s Tax Tax 3% on value for natural gas and non-stripper oil severed 2% on value for stripper oil severed 0.2% tax on value of oil or gas at wellhead Up to $0.20 per 50,000 cubic feet of natural gas or barrel of oil 0.1% tax on fair market value per barrel of oil 3.75% of taxable value of oil or gas severed and sold % of taxable value for enhanced recovery project oil and gas 2.45% of taxable value for well workover projects in excess of production projection 1.85% or % of taxable value for stripper wells $0.19% of taxable value of sold oil or gas Oil: o 3.15% of taxable value o 1.58% for stripper wells producing less than or equal to $15 per barrel o 2.36% for stripper wells producing oil greater than $15 but less than $18 per barrel Gas: o 4% of taxable value o 2% for stripper well with annual value less than $1.15 per MCF o 3% for stripper wells with annual value greater than $1.15 but less than $1.35 per MCF Rate based on assessed value of property $ per mmbtu of natural gas multiplied by adjustment factor Adjustment factor equal to the annual taxable value per MCF of natural gas divided by $1.33 Up to 5 mills per barrel of oil Up to 5 mills per MCF of gas 1% of revenues deposited in Severance Tax Administration Balance of revenues: o Received from school lands deposited in the Permanent School o Received from non-school lands: Up to $300,000 per year deposited in the State Energy Office Cash (determined by legislature through appropriation process) Up to $30,000 per year allocated to the Public Service Commission for administration of the Municipal Rate Negotiations Revolving Loan (determined by legislature through appropriation process) Remainder is deposited in the Permanent School Revenues deposited in the Revenues credited to the Revenues deposited in the state general Revenues deposited in the severance tax bonding Remaining revenues deposited in the severance tax permanent. Revenues deposited in the Reclamation and the state general Revenues distributed to the state general Revenues deposited in the oil and gas production Revenues distributed to state general Revenues used to carry out expenses associated with Act National Conference of State Legislatures 9

10 State Revenues and the Natural Gas Boom: An Assessment of State es Appendix A. Taxes on the Production and Severance of and Tax Revenue Allocation State Tax Type Tax Description Revenue Allocation North Dakota Gross Oil Extraction Tax $ per MCF of gas (changes annually on July 1) 5% of gross value of natural gas or oil 6.5% of gross oil value 4% of gross oil value if well qualifies for reduced rate 2% of gross oil value for qualifying wells in Bakken formation Ohio $0.025 per MCF of natural gas $0.10 per barrel of oil Oklahoma Oregon Gross Production Petroleum Excise Tax Production Fee Tax on gross production and based on monthly average crude oil and gas prices: o 7% if oil price equal to or greater than $17 per barrel, gas price equal to or greater than $42.10 per MCF o 4% if oil price less than $17 but greater than or equal to $14 per barrel, gas price less than $2.10 and greater than or equal to $1.75 per MCF o 1% if oil price less than $14 per barrel, gas less than $1.75 per MCF 0.095% of taxable oil or gas value $ per barrel of petroleum liquid produced $ per MCF of natural gas produced Oil and gas exempt from oil and gas production tax exempt. 6% of gross value of oil or gas well production First $3,000 in gross sales values from each calendar quartile exempt Credits for ad valorem taxes on oil or gas production 30% of revenues deposited in the state Legacy Remainder distributed, via formula, to Impact and political subdivisions within state, including state general 30% of revenue credited to Legacy Remaining revenues: o 20% credited to Resource Trust o 10% credited to Common Schools Trust o 10% credited to Foundation Aid Stabilization o 60% credited to state (distributed via formula) 10% of revenue deposited in the Geological Mapping 90% of revenue deposited in the Gas Well Revenues distributed to: o General Revenue o County Highway o Counties based on an average daily attendance per capita distribution basis Revenue distribution to these s varies based oil or gas tax rates Revenues from oil: o % deposited to the General Revenue o % deposited to Corporation Commission Plugging o 6.84% deposited to the Interstate Oil Compact of Oklahoma Revenues for Gas: o % deposited to the General Revenue o % deposited to the Corporation Commission Plugging o 6.84% deposited to the Interstate Oil Compact of Oklahoma 3% of revenues deposited in the Oklahoma Tax Commission Revolving Remaining revenues, before July 1, 2013, deposited in the Commission on Marginally Producing Wells Revolving Remaining revenues, after July 1, 2013, deposited in the Sustaining Oklahoma s Energy Resources Revolving After res distributed and after s distributed to Department of Revenue for expenses related to tax: o Revenue deposited in Common School National Conference of State Legislatures 10

11 State Revenues and the Natural Gas Boom: An Assessment of State es Appendix A. Taxes on the Production and Severance of and Tax Revenue Allocation State Tax Type Tax Description Revenue Allocation Pennsylvania South Dakota Tennessee Texas Utah Unconventional Gas Well Fee (no severance tax) Energy Minerals Tax on Severance of Energy Materials Gas and Oil Gas and Oil Field Clean-Up Regulatory Fee Fee Fee on oil or gas well. Fee changes annually with price of natural gas. 4.5% of taxable value of energy minerals (including oil and gas) Excise tax of $ of taxable value 3% of sale price of natural gas and crude oil 7.5% tax of gas market value 4.6% tax of oil market value 4.6% tax of gas condensate market value for gas condensate Incentives and exemptions for inactive wells, marginal wells, and high cost gas wells $ per barrel of crude oil $ per MCF of gas Oil (percent of market value): o 3% if valued at $13 or less per barrel o 5% if valued above $13 per barrel Gas (percent of market value): 3% if valued at $1.50 or less per MCF 5% if valued above $1.50 per MCF 4% of value for natural gas liquids Taxes not imposed on oil and gas stockpiled for over 2 years, stripper wells, and the first 6 months of production for development wells. Enhanced recovery projects receive a 50% tax reduction $0.002 of the value of gas or oil Revenue deposited in the Unconventional Gas Well with the following earmarks: o County Districts: $7,500,000 o Pennsylvania Fish and Boat Commission: $1,000,000 o Public Utility Commission (PUC): $1,000,000 o Department of Environmental Protection: $6,000,000 o PA Emergency Management Agency: $750,000 o Office of State Fire Commissioners $750,000 o Dept. of Transportation $1,000,000 o Marcellus Legacy (Natural Gas Energy Development Program): $2,500,000 After earmarks: o 60% revenues given to counties and municipalities through the unconventional gas well o 40% of revenues allocated for statewide initiatives through the Marcellus Legacy 50% of revenues distributed to County Trust and Agency Account 50% to General Revenues from oil and gas deposited in the Environment and Natural Resources Fee for gas and oil conservation 1/3 of revenues allocated to producing county 2/3 of revenues deposited in the state general 0.5% of revenues used for enforcement of production tax and tax provisions Remaining revenues: o 25% deposited in the Foundation School o 75% deposited in the General Revenue Revenues deposited in the Regulation and Cleanup Account Revenue in account may not exceed $20 million or fall below $10 million Revenues earmarked (via formula) to: o Uintah Basin Revitalization for revenues produced from oil or gas on Ute land o Navajo Revitalization for revenues produced from Navajo Nation land After earmarks: o Revenues deposited to the general o Revenues exceeding $27,600,000 deposited in state permanent trust Revenues credited to the Account of the General National Conference of State Legislatures 11

12 State Revenues and the Natural Gas Boom: An Assessment of State es Appendix A. Taxes on the Production and Severance of and Tax Revenue Allocation State Tax Type Tax Description Revenue Allocation Virginia West Virginia Wisconsin Wyoming City and County License Taxes on Severed Materials Worker s Compensation Debt Reduction Act Tax Oil and Natural Gas Severance Tax Oil and gas Fee County or city governing bodies authorized to impose: o 1.5% gross severance tax on oil o 1% gross severance tax on coal or gas Counties and cities can levy additional maximum 1% gross tax on gas Cities and counties may adopt a maximum 1% gross tax on every person engaged in the business of severing coal or gas 5% of gross value of natural gas or oil Natural gas from wells producing less than 5,000 MCF per day and oil wells producing less than 0.5 barrels per day exempt. Wells not producing marketable quantities for 5 consecutive years exempt for up to 10 years. $0.47 per MCF of natural gas Tax will be terminated when Governor declares liability provided for in its entirety. 7% of market value of total oil or gas production 6% of fair market value for natural gas or oil 4% on stripper oil Up to 8/10 of a mill ($0.0008) of oil and gas market value Key: BTU = British Thermal Unit BBL = Barrel MCF = One thousand cubic feet Mill levy = A tax on the assessed value of a property. One mill is $1 per $1,000 of assessed value. MMBTU = A thousand thousand BTUs (also expressed as MBTU 1,000 BTUs) Source: Various state websites. Revenue from additional gas tax deposited to the general of producing county or city Revenues from additional gas and coal tax deposited in the Coal and Gas Road Improvement. Localities that comprise the Virginia Coalfield Economic Development Authority distribute 75% of revenues to the Coal and Gas Road Improvement, and 25% to the Virginia Coalfield Economic Development. 90% of revenue deposited in the general o First $24 million of the severance taxes collected, including those from coal and other minerals, allocated to debt service for infrastructure bonds 10% allocated to counties and municipalities o 75% distributed to oil and gas producing counties o 25% distributed to all counties and municipalities, based on population densities First $4 million in revenues attributable to coalbed methane: o 75% distributed to oil and gas producing counties o 25% distributed in equal shares to non-oil and gas producing counties, with no producing county receiving less than a non-producing county Revenues deposited in the Workers Compensation Old Revenues deposited in state general Revenues from 1.5% of tax on fair market value for natural gas and oil, including stripper oil, deposited in the Permanent Wyoming Mineral Trust Remaining revenues collected in Severance Tax Distribution Account to be distributed as follows: o 62.26% deposited in state general o 15.05% deposited in water development accounts o 4.33% deposited in the highway o 3.88% credited to counties o 2.9% deposited to road construction and maintenance s o 9.25% credited to cities and towns o 2.33% deposited in capital construction account Revenues credited to the Commission National Conference of State Legislatures 12

13 State Revenues and the Natural Gas Boom: An Assessment of State es Appendix B. Pending and Enacted Bills Relating to es and Revenue Allocation State Bill Status Description Alabama AL H 503 Enacted Specifically expands the authority of the Board to include oil sand. Authorizes the board to set fees for the recovery of oil from oil sands. Alaska AK H 72 Pending- Carryover AK H 111 AK H 117 AK S 50 Pending- Carryover Pending- Carryover Pending- Carryover Amends oil and gas production tax credits. Amends oil and gas production tax credits and adjusts production tax rates. Increases amount legislature may appropriate to revenue sharing from oil and gas production tax revenues. Amends oil and gas production tax credits and adjusts production tax rates. AK S 21 Enacted Amends tax to 35% of oil or gas value, beginning January 1, 2014 California CA S 241 Pending Imposes an oil and gas severance tax of 9.5% of the average price per barrel of oil and 3.5% of the average price per unit of gas. The bill exempts oil from stripper wells producing less than 5 barrels of oil per month and oil and gas from land owned by the state or a political subdivision of the state. Revenues will be deposited into the general and then into the California Higher Education. 90% of the tax revenues will be distributed equally among the Regents of the University of California, the Trustees of the California State University, and the Board of Governors of the California Community Colleges. 5% of the revenues will be allocated to the Department of Parks and Recreation for the maintenance and improvement of state parks. Colorado CO H 1057 Enacted For severance tax revenues allocated to the severance tax trust, allows up to 15% of revenue to be used for the Colorado geological survey and up to 5% for the avalanche information center. Illinois IL S 1715 Enacted Creates the Hydraulic Fracturing Regulatory Act. Creates a severance tax on oil and gas whose proceeds are allocated to General Revenue. Kansas KS H 2088 Pending Changes severance tax revenue appropriations. Legislation would allocate 7% of revenues to the special county mineral production tax, 12.41% of revenues to the oil and gas valuation depletion trust, and the remainder to the state general KS S 76 Pending Changes severance tax revenue appropriations. Legislation would allocate 7% of revenues to the special county mineral production tax, 12.41% of revenues to the oil and gas valuation depletion trust, and the remainder to the state general. KS S 206 Pending Changes severance tax revenue appropriations. Legislation would allocate 7% of revenues to the special county mineral production tax and the remainder to the state general, abolishing the oil and gas valuation depletion trust. KS H 2059 Enacted Exempts severance tax from oil wells for which oil first produced after July 1, 2012 and for which daily production does not exceed 50 barrels for day for up to 24 months. A well is no longer exempt if its average daily severance and production exceeds 50 barrels per day over a one month production period. KS H 2262 Pending Changes severance tax revenue appropriations. Legislation would allocate 7% of revenues to the special county mineral production tax, 8.25% of revenues to the oil and gas valuation depletion trust, and the remainder to the state general KS S 241 Pending Changes severance tax revenue appropriations. Legislation would allocate 6% of revenues to the special county mineral production tax, 6% of revenues to the oil and gas valuation depletion trust, and the remainder to the state general Louisiana LA H 520 Pending Proposes a constitutional amendment that would exclude the first $1,000 of the value of severed natural resources from valuation for an ad valorem severance tax. LA H 616 Pending Adjusts oil and gas severance tax rates and changes special tax treatment for certain types of oil and gas production. LA H 474 Pending Changes tax exemption provisions for oil and gas production from wells previously inactive for at least 2 years. Subjects inactive wells to a reduced severance tax rate. LA H 683 Pending Provides exemptions and other special tax treatment for certain types of oil and gas production. National Conference of State Legislatures 13

14 State Revenues and the Natural Gas Boom: An Assessment of State es Appendix B. Pending and Enacted Bills Relating to es and Revenue Allocation State Bill Status Description Michigan MI H 4609 Pending Changes severance tax revenue allocation, distributing 2% of revenues to the orphan well, 50% of the remaining s to the state general, and the other 50% to the state transportation department. Minnesota MN H 1336 Pending Imposes an extraction tax of $1 per ton on fracturing sand. Revenues will be credited to the a special account within the state general and appropriated to the Environmental Quality Board. 1/3 of the tax revenues will be appropriated for the maintenance of roads in counties with active fracturing sand mines. 1/3 of the revenues will be appropriated to the commissioner of natural resources to acquire land or interests in land as scientific and natural areas in the areas of the state with industrial silica sand resources likely to be mined. 1/3 of revenues will be appropriated to the Board of Water and Soil Resources. MN S 1487 Pending Imposes an extraction tax of $1 per ton on fracturing sand. Revenues will be credited to the a special account within the state general and appropriated to the Environmental Quality Board. 1/3 of the tax revenues will be appropriated for the maintenance of roads in counties with active fracturing sand mines. 1/3 of the revenues will be appropriated to the commissioner of natural resources to acquire land or interests in land as scientific and natural areas in the areas of the state with industrial silica sand resources likely to be mined. 1/3 of revenues will be appropriated to the Board of Water and Soil Resources. Mississippi MS H 1698 Enacted Reduces the natural gas and oil severance tax rate to 1.3% of the value for oil and gas wells beginning production July 1, 2013 for 30 months. Revenue produced from wells subject to the reduced rate will be allocated to county in which gas or oil produced. Montana MT H 39 Enacted Clarifies distribution of s from the county school oil and natural gas impact. MT S 175 Enacted Redirects oil and natural gas production tax revenue from the state general to a new natural resource development K-12 ing payment, beginning in 2014, to support base budgets of school districts. North Carolina NC S 76 Pending Would establish a severance tax of 1% per barrel or MCF for well condensates and up to 1% per barrel or MCF for oil or gas, respectively, from a well. After res distributed, 25% of revenues, up to $1,000,000, would be allocated to the Department of Environment and Natural Resources. Of the remaining revenues, 50% would be deposited in the state general and 50% would be deposited in the Onshore Energy Management. North Dakota ND H 1134 Enacted Amend gas flaring restrictions. Provides a 2-year and 30-day tax exemption for oil and gas wells that use a system that avoids gas flaring. ND H 1198 Enacted Defines stripper well. Keeps oil tax extraction exemptions set to expire July 1, 2013, in place. ND H 1278 Enacted Amends oil and gas gross production tax allocation. Reallocates 1/5 of tax revenue collected from gas and revenue collected from 1% of the gross value at the well of the oil. Allocates $500,000 each fiscal year to oil producing cities with populations of at least 75,000 and more than 2 percent of private employment engaged in mining industry. Allocation is doubled if city has more than 7.55% of private employment engaged in mining industry. Credit revenues to the oil and gas impact grant, not exceeding $100,000,000 per biennium. Credits 4% to the North Dakota outdoor heritage, not to exceed $15,000,000 per fiscal year. Remainder allocated to state general. ND H 1358 Enacted Amends oil and gas gross production tax allocation. Reallocates 1/5 of the tax revenue collected from gas and revenue collected from 1% of the gross value of oil. Cities with populations over 12,500 are allocated $375 per fiscal year, and school districts within these cities are allocated $12,500 per fiscal year, for each full or partial percentage point of the city s private covered employment engaged in the mining industry. Revenues, not exceeding $240 million, are deposited in the oil and gas impact grant. Of remaining revenues, $5 million are allocated to the gas or oil producing county. Of the remaining revenues, 25% is allocated to the gas or oil producing county. Of the remaining revenues, 30% is allocated to the legacy and the remainder is allocated to the state general. ND S 2014 Enacted Amends oil and gas gross production tax allocation. Changes distribution of revenues from the oil extraction tax development. Established the oil and gas research. Before depositing oil and gas gross production tax and oil extraction tax revenues in the general, property tax relief sustainability, strategic investment and improvements, or the state disaster relief, 2% of the revenues must be deposited monthly into the oil and gas research, up to $10 million per biennium. National Conference of State Legislatures 14

15 State Revenues and the Natural Gas Boom: An Assessment of State es Appendix B. Pending and Enacted Bills Relating to es and Revenue Allocation State Bill Status Description Oklahoma OK H 2290 Pending Authorizes local counties to impose a shale well gas impact fee. s to be used for: construction, reconstruction, maintenance, and repair of roadways, bridges and public infrastructure; water, storm water and sewer systems, including construction, reconstruction, maintenance and repair; emergency preparedness and public safety, including law enforcement and fire services, hazardous material response, 911, equipment acquisition and other services; environmental programs, including trails, parks and recreation, open space, flood plain management, conservation districts and agricultural preservation; preservation and reclamation of surface and subsurface waters and water supplies; projects to increase the availability of safe and affordable housing to residents; records management, geographic information systems and information technology; delivery of social services; training of workers in the oil and gas industry at technology center schools. OK S 905 Pending Reduces the tax rate on the production of oil, gas or oil and gas from a horizontally drilled well to 1% for 28 months from the month of initial production for production commenced on or after July 1,2011, through June 30, 2013, and 2% for 48 months from the month of initial production for production commenced on or after July 1, OK H 1764 Pending Apportions $50,000,000 of gross production tax on natural gas to the Teachers Retirement System Cost-of-Living Adjustment Revenue. OK H 1769 OK H 1992 Pending- Carryover Pending- Carryover Enacts the Gross Production Revenue Stabilization Act of Changes allocation of oil and gas production tax revenues beginning July 1, Amends duration of gross production tax incentives. OK S 767 Enacted Allocates revenues from fee on oil and gas production to a revolving for the Committee for Sustaining Oklahoma s Energy Resources for the purpose of encouraging and ing research and development of new technologies in the oil and natural gas industry and to support activities relating to marginally producing oil and gas wells, Utah UT HJR 20 Adopted Gives the Legislative Management Committee items of study it may assign to the appropriate interim committee during the 2013 legislative interim. Includes a study of whether certain severance tax revenue should be deposited into the education and the permanent state trust, whether to change or repeal certain oil and gas severance tax exemptions, and whether to adjust certain severance tax rates. Virginia VA H 2110 Enacted Allows Coal and Gas Road Improvement to be used towards the construction of natural gas service lines. Such s may be used to construct, repair, or enhance natural gas service lines or systems and may not exceed ¼ of the revenue paid to the Coal and Gas Road Improvement from the severance tax. Washington WA H 1856 Pending- Carryover Imposes 5% excise tax on oil and gas at point of production. 80% of revenues deposited in the land trust revolving. 20% of revenues deposited in the local government severance taxation account. Indicates oil and gas tax exemptions West Virginia WV S 638 Enacted Terminates a severance tax exemption for natural gas or oil produced from any horizontally drilled well that has not produced marketable quantities for five consecutive years immediately preceding the year in which such well is placed back into production and thereafter produces marketable quantities of natural gas or oil. Key: BTU = British Thermal Unit BBL = Barrel MCF = One thousand cubic feet Mill levy = A tax on the assessed value of a property. One mill is $1 per $1,000 of assessed value. MMBTU = A thousand thousand BTUs (also expressed as MBTU 1,000 BTUs) Source: Various state websites. National Conference of State Legislatures 15

16 State Revenues and the Natural Gas Boom: An Assessment of State es Notes 1. U.S. Energy Information Administration, Natural Gas Gross Withdrawals and Production (Washington, D.C.: U.S. EIA, May 31, 2013), sum_dcu_nus_m.htm. 2. U.S. Energy Information Administration, Frequently Asked Questions (Washington, D.C.: U.S. EIA, n.d.), www. eia.gov/tools/faqs/faq.cfm?id=46&t=8. 3. Associated Press, Marcellus shale gas production boom stirs debate over taxes, Tribe Live, May 11, 2013, 4. Mary Cusick, AP: Shale Gas Impact Fee Misses Billions in Potential Revenue, State Impact, May 13, 2013, 5. Office of Budget and Management, State of Ohio: the Executive Budget Fiscal Years (Columbus: Feb. 4, 2013), pdf. 6. Ohio Association, Ohio s Crude Oil and Natural Gas Producers Stand Against Tax-Increase Proposal (Granville, Ohio: OOGA, March 26, 2012), org/wp-content/uploads/ohioscrudeoilandnaturalgasproducersstand-pr pdf. 7. National Conference of State Legislatures, State es (Denver: NCSL, 2012), East First Place Denver, Colorado (303) National Conference of State Legislatures William T. Pound, Executive Director 444 North Capitol Street, N.W., #515 Washington, D.C (202) by the National Conference of State Legislatures. All rights reserved. ISBN National Conference of State Legislatures 16