How Much Do U.S. State Governments Really Tax Oil and Gas Extraction?

Abstract

Growth in oil and gas production in the continental U.S. has led some states to reconsider their taxation of production, prompting comparisons of state policies, especially the rate at which production is taxed. Cross-state comparisons are problematic because states often selectively apply their rates. Using state-level data on oil and gas production and the revenue generated by it, we calculate an effective average tax rate on production. For the 2004-2013 period, we find much variation in effective rates across states, with three states having a rate of 0.1 percent or less and three states having a rate of more than 7.0 percent. The typical state had a 3.6 percent tax rate while the typical dollar of production was taxed at a higher rate, at 4.4 percent. The average state rate increased by about 20 percent from the 2004-2008 period to the 2009-2013 period while taxation of the typical dollar of production saw a smaller increase. On average state tax policy is neutral towards oil versus gas, taxing both at a similar rate.