Budget Rollercoaster and the Oil Severance Tax

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

Californians have ridden the down side of the budget rollercoaster in the recent past because of heavy reliance on upper income taxpayers taking a hit during recessionary times. The state budget could face that again considering the steep drop in the stock market of late. Is this a precursor of budget woes to come? A similar scenario is playing out in other states because of a type of tax that some California environmentalists and legislators want to implement in this state—an oil severance tax.

Discussion about placing an oil severance tax on the ballot has faded a bit because of louder chatter supporting income tax and property tax measures. That’s despite the advocacy of Tom Steyer, the billionaire environmental activist, who has voiced support for such a severance tax measure. But before anyone jumps on that bandwagon as a way to bring big revenue to the state, take a look at the new statistics put out by the U.S. Energy Information Administration, a part of the United States Department of Energy.

According to an EIA report issued last week state budgets that rely on severance tax have taken a hit with the drop in oil prices.

Six state budgets are feeling the effects of falling severance taxes, which in some cases include minerals as well as oil. Alaska has taken the biggest hit because the severance tax accounts for 72% of state revenues. Given the sharp decline in that revenue, the governor has proposed a 6% income tax to make up for some of the lost funds.

North Dakota’s take from the severance tax dropped from $3.5 billion last year to $2 billion this year. Oklahoma’s severance tax makes up 8% of all state revenue, but because the oil and natural gas industry is such an important business in the state, there has been a fall off in other taxes as well as the severance revenue. Oklahoma faces a $900 million budget deficit, about 13% of its General Fund budget. Texas, Wyoming and West Virginia have also seen general fund revenue drops from severance taxes.

Of course, many supporting an oil severance tax in California are not only looking for new revenues for the state to spend. Environmental advocates see the tax as a way to lessen the reliance on fossil fuels by making them more expensive to attain.

The debate on this type of tax may go into hiatus for the coming election cycle. When it comes back the ups and downs of the oil economy will be part of the discussion.

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