Dropping Oil Prices Are Hammering Tax Revenues in Energy-Producing States
HildeAnna / Shutterstock.com
A new brief from the U.S. Department of Energy outlines some of the fiscal ramifications of the energy industry declines in six states.
As oil prices continue to slump, states that collect substantial taxes tied to fossil fuel production are grappling with eroding revenues, analysts at the U.S. Department of Energy noted in a brief published Tuesday.
Six states are identified as experiencing the greatest blowback in terms of declining tax revenues. They are: Alaska, Texas, North Dakota, Wyoming, Oklahoma and West Virginia.
Taxes on the extraction of nonrenewable fossil fuels are commonly referred to as “severance taxes.” The Department of Energy brief highlights how downturns in the collection of these taxes, and other types of tax revenue, are playing out differently across each state.
For example, Alaska has seen its severance tax revenues slide “further and faster” than other states. This is because the state’s “tax is based on the operators’ net income rather than on the value or volume of oil extracted,” according to the brief.
“In 2015, when average net incomes after operating and capital expenses were near zero, the state derived practically no revenue from this tax, versus more than $5 billion in 2012,” the analysts wrote. They added that, according to 2014 data, severance taxes provided about 72 percent of Alaska’s tax revenue.
In December, Gov. Bill Walker proposed implementing a personal income tax in Alaska for the first time in over three decades to help shore-up the state’s finances. The governor also put forward a plan to reduce an annual dividend paid to Alaska residents, which is derived from the investment earnings of mineral royalties.
In contrast to Alaska, Texas looks to be in a better position when it comes to coping with the energy sector downturn.
Tax revenues there last November from the production and regulation of oil were down 51 percent from 2014, while revenues from natural gas production were off by 48 percent, the Energy Department brief said. But it went on to explain that severance taxes accounted for just 11 percent of the state’s total tax receipts in 2014, and that “Texas can likely respond to the lower severance tax receipts without drastic changes to its enacted 2016 budget.”
In addition to severance taxes, the brief pointed to other revenue sources that have sagged due to the anemic energy market.
North Dakota, for example, has seen lower than anticipated sales tax collections, which are to some extent connected to oil industry activities in the state’s energy-rich Bakken region. Oil and natural gas prices influence sales tax revenue in Oklahoma as well, along with revenue from the state’s individual and corporate income taxes, the Energy Department brief also notes.
In late December, Moody’s Investors Service cautioned that flagging energy prices, and production, were poised to create budget stress in oil and gas producing states.
“Decreased US production will lead to increasing job losses in oil and gas and related manufacturing sectors, all of which involve jobs that are well paid on average," the Moody's analysts wrote. "These losses will depress energy states’ personal income, corporate income and sales taxes through the second half of fiscal 2016 and into fiscal 2017."
On Tuesday, the price of oil continued to falter.
West Texas Intermediate crude—a benchmark for U.S. oil—fell below $30 a barrel for the first time since 2003. During the second full week of January last year, the spot price for a barrel of the crude was between $45 and $49, according to Energy Department data.
The brief the Energy Department issued on Tuesday can be found here.
Bill Lucia is a Reporter for Government Executive’s Route Fifty.
NEXT STORY: Helping Drug-Addicted Inmates Break the Cycle