A Severance Tax Revenue Forecast Model for Louisiana

Abstract

Most states levy severance taxes on the value of natural resources when they are severed or extracted from the ground or subsurface. In Louisiana, severance tax on oil and gas production contributes to the majority of mineral revenue in the state, and over the last decade, has ranged between $400 million and $1.1 billion, or between 5 and 9% of annual state revenue. The purpose of this article is to develop a forecast model for severance tax revenue to better understand the severance tax regime and to assist in state budgeting and planning purposes. We couple an oil and gas production model with empirical relationships describing historical severance tax receipts to perform the forecast. We demonstrate that oil production correlations are robust, but that in recent years, unconventional gas production from the Haynesville shale has led to a significant departure from historic trends. We estimate that cumulative oil and gas severance tax revenues during 2011–2015 will range from $1.0 to $2.1 billion for oil and $1.3–$1.9 billion for gas. Louisiana is transforming into a gas-producing state, and more attention needs to be paid to tax design and the impact of exemptions on future severance revenue receipts.