Severance taxes are our most volatile funding source. The severance tax is a specialized form of income tax that is levied when owners sell minerals. Oklahoma levies gross production, or severance taxes, on oil, gas, and other natural products taken from land or water. Since the revenue depends both on the amount of minerals extracted and the price of the minerals, it can vary greatly from year to year.
In the early 1980s, this was the state’s largest revenue producer. After falling in the mid-1980s and 1990s, the gross production tax rebounded in the 2000s to again be an important tax source. It raised $1.2 billion in 2008 and accounted for one-tenth of state and local tax revenue. Higher prices contributed to a dramatic 39 percent revenue increase in 2006. Revenue grew more slowly from 2006 to 2008. Oklahoma falls behind only Alaska and Texas in revenue from severance taxes, according to the U.S. Census Bureau.
Advantages of a severance tax are:
- Since most of the minerals are used out of state, most of the tax ultimately is paid by non-Oklahomans; and
- Since there is no property tax on minerals, the only tax paid is when they are mined or pumped; the tax system therefore encourages conservation.
Disadvantages of a severance tax include :
- The volatile nature of markets makes it impossible to depend on the revenue from year to year; and
- The tax is not horizontally equitable since non-minerals producers with the same income may pay different taxes.
The severance tax is a percentage of the gross value of the resource. The taxes on natural gas and oil (from 1 to 7 percent of value, depending on the price) are the most important, but Oklahoma also levies taxes on uranium and ores. The gross production tax was first put in place in 1908. Rates were eventually increased to seven percent in 1971. In 2001 and 2002, lower rates were created for periods of low oil and gas prices. In recent years, the Legislature has created a number of tax rebates and exemptions to encourage production. For FY ’11 and ’12, payments were deferred on some rebates; beginning in FY ’13, payments will be made as a front-end credits rather than as rebates. There also is a 1 percent excise tax on petroleum above the gross production tax.
Gross production taxes are paid to the Oklahoma Tax Commission monthly by the first purchaser of the minerals, and withheld from the payment to the owner of the mineral rights. The Commission divides up the revenue between the general revenue fund, payments to counties where the minerals were taken for roads and schools and to fund various state education and environmental programs.
Read OK Policy’s fact sheet on the gross production tax