Spatially variable taxation and resource extraction: The impact of state oil taxes on drilling in the US

Abstract

We estimate the responsiveness of nonrenewable resource firms to taxes on output using spatially explicit data from the oil sector in the United States. Using a model of resource firm capital allocation over space, we show that responses to spatially-varying taxes differ from responses to equivalent changes in the common output price. A larger response to tax rates occurs because the tax change only affects the returns to drilling in a single state, whereas a price change affects both the returns to drilling in a state and the opportunity cost of not drilling in other states. Econometrically, we estimate the effect of severance taxes on oil drilling. We find that the response to a one dollar increase in tax per unit of production has an effect at least eight times as large as the effect of an equivalent decrease in output price. The tax response is inelastic, implying that an increase in state tax rate would increase revenue. We do not find evidence of spillovers between states in the local areas near state borders.