Severance Tax Research Articles

Toward an Elasticity of Chip-N-Saw: Demand and Supply Models of Chip-N-Saw Stumpage in Louisiana

Softwood chip-n-saw (CNS) is a relatively new stumpage product in the sawtimber- and pulpwood-dominated stumpage markets in the U.S. South. Based on a quarterly data series from 2003 to 2016, this study estimates the demand and supply models of the softwood CNS stumpage market in Louisiana. The two-stage least squares (2SLS) results reveal that own price elasticity of demand (PED) is price elastic, and the cross-price elasticity (XED)with sawtimber approaches unit elasticity. On the supply side, CNS is price inelastic in supply (PES), but more responsive to own price changesthan sawtimber quantity supplied. Further, severance tax increases are found to decrease the supply of CNS, indicating that suppliers are responsive to severance tax incidence. As the first empirical estimation of CNS, the findings should be of interest to those involved in the analysis of Southeastern stumpage markets.

The fiscal impacts of increased U.S. oil and gas development on local governments

Increased US oil and gas production has created opportunities and challenges for local governments. Through interviews with roughly 250 local officials, we evaluate the fiscal effects of this development in 21 regions across every major US oil and gas producing state during “boom” and “bust” periods. Growing oil and gas production has increased local government revenues through a variety of mechanisms, including property taxes, sales taxes, severance taxes, and more. Industry activity has also increased costs and demand for local services led by road damage, water and wastewater infrastructure, and a range of staff costs including emergency services and law enforcement. Despite volatility in revenues and service demands, our interview results show that 74% of local governments have experienced net fiscal benefits, 14% reported roughly neutral effects, and 12% reported net fiscal costs. Local governments in highly rural regions experiencing large-scale growth have faced the greatest challenges. To further improve future outcomes, local officials can plan for impacts, state policymakers can re-examine revenue policies, and operators can pursue collaboration with local governments.

Legal Status of Payments for Subsoil Use and Securing Fiscal Interests of the Russian State

The paper features the current Russian Federation system of obligatory public law payments forusing subsoil represented by taxes, non-tax payments and agreements on production-sharingagreement. Production-sharing agreement is seen as a special tax regime specified in Chapter26.4 of the Russian Federation Tax Code as a taxation system to execute the production-sharingagreement. The system approach is seen in the aggregate payments made by the investor to carryout the production-sharing agreement. The author studies the systems of the legal regulation ofpayments for using subsoil, tax on the extraction of natural resources and annuity typical of all thetypes of relevant payments. The paper explores the balance of the concepts of natural resourceand mining rents, tax and other instruments to withdraw mining rent, profitability of the payments.It contains analysis of legal mechanisms of the taxation of extracting solid natural resources andhydrocarbon crude; interprets the concepts of severance tax, natural resource in terms of taxationand case practice. A special attention is given to the guidelines of licensing applied to confirm theright of the licensee to use the subsoil area, to specify its borders, aim and terms and conditionsof use. Author proposes his own classification of the coefficients to base tax rate for the naturalresource extraction tax and their incentives. It is presented classification of any type of differentiation;the various payments are grouped up by natural resource, their influence on the base tax rate, aimof application, on the association with the territory where natural resources are extracted. The paperalso studies the legal nature and characteristics of regular and one-time payments, the issues ofliability to evade the payments, the powers of the executive bodies regulating the payments forusing subsoil. It is provided author’s recommendations to limit the powers of the Russian FederationNatural Resource Ministry (Minprirody) and to broaden instead it, the rights of the Government of theRussian Federation to perform the legal regulation of the payments for using subsoil. It is identifiedoverall trends in the development of the Russian legislation on natural resource taxation.

Leaving Money on the Table: Pennsylvania Exceptionalism in Resisting Energy Severance Taxes

Nearly all energy-producing states elect to adopt and sustain a tax on the extraction of their oil and gas resources through so-­called severance taxes, generating significant revenue for general as well as specialized state funds. Political support for such taxes generally crosses party lines and endures across multiple partisan shifts in the political control of a state. This reflects numerous features that tend to make these taxes quite popular and durable across election cycles. This long-­standing pattern, however, faces one major exception: Pennsylvania’s enduring reluctance to follow the path of other major energy-producing states and adopt such a tax. This article explores what it deems “Pennsylvania exceptionalism,” as it seeks to address the issue of why one leading energy-­producing state would refrain from tax adoption in contrast to every other such state. It places particular emphasis on the past decade, in which natural gas in shale deposits has triggered a dramatic expansion of production in Pennsylvania and ongoing political controversy over whether or not a severance tax should be adopted.

Short-run impacts of a severance tax change: Evidence from Alaska

Energy states face a fundamental tradeoff when increasing severance tax rates: potential gains in tax revenues versus potential losses in exploration, development, and production activity. Despite the significant implications of this tradeoff, there is very little empirical evidence on the short-run responsiveness of extraction-related activities to changes in severance taxes. We conduct a comparative case study to evaluate the short-term impact of a severance tax increase on oil-related activities and development in Alaska. In 2007, the introduction of “Alaska's Clear and Equitable Share” (ACES) more than tripled the tax liability for much of the oil already under production in Alaska. We construct a synthetic Alaska from a set of U.S. energy states, with the purpose of estimating the counterfactual evolution of oil production, exploration and development wells, gross state product, and employment, in the absence of ACES. Overall, our results indicate that there is no discernible difference in the outcome variables of interest between Alaska and its synthetic control after the implementation of ACES, suggesting that ACES had a minimal effect on Alaskan oil-related activity and development in the short run.

The Substantive Scope of Tax Treaties in a Post-BEPS World: Article 2 OECD MC (Taxes Covered) and the Rise of New Taxes

Several countries have recently either introduced or announced plans for new taxes addressing base erosion and profit shifting by multinational enterprises. These taxes include the Indian Equalization Levy, the UK Diverted Profits Tax, the announced Australian Diverted Profits Tax, the Netherlands Excessive Severance Tax as well as the Belgian Fairness Tax. Moreover, US Republicans plan to substitute the corporation tax with a (destination based) cash flow tax. It remains uncertain whether these hybrid taxes are covered by tax treaties. The uncertainty relates both to the definition of an income tax according to Article 2(2) OECD MC and to the term ‘identical or substantially similar taxes’ pursuant to Article 2(4) OECD MC. Against this background of legal uncertainty, the authors favour a procedural solution introducing an obligation for the contracting states to reach a mutual agreement as to whether or not new taxes are covered by the tax treaty.

Fracking and environmental protection: An analysis of U.S. state policies

This paper examines the correlates of state policies designed to mitigate prospective environmental impacts associated with U.S. oil and gas drilling (fracking operations). I found that policy decisions are especially influenced by political factors such as the partisan orientations of the statewide electorate and the ideological makeup of state voters as well as economic resource variables such as the generation of revenue from severance taxes. Less important in accounting for variation in state fracking policies are socioeconomic characteristics such as median educational attainment and per capita income and general indicators of a state's prior receptivity to the enactment of environmental programs.

Does IT Modernization Affect Tax Take?

We find that, for many categories of taxes, states that have upgraded their tax-processing systems see statistically and economically significant increases in collections relative to states that have not. Specifically, we detect positive impacts for amusement taxes, tobacco taxes, motor vehicle licensing taxes, individual income taxes, and severance taxes in states that have followed this approach to the procurement of tax-processing systems. We find no evidence that financial administration expenditures increase for these states.

Trusting in the future: The re-emergence of state trust funds in the shale era

Energy-producing states confront numerous challenges related to the boom-and-bust of resource extraction, including substantial fluctuation in revenue produced by severance taxes. Revenues surge as drilling expands during booms, creating many pressures for immediate expenditure. This often sets up enormous strain during bust periods when revenues plunge as longer-term needs emerge. This paper, however, examines the small set of states that have devised unique mechanisms to prepare for future busts. It reviews two periods (1970s and 2010s) in which six oil and gas-producing states amended their state constitutions to place severance tax revenues into permanent trust funds for long-term stewardship. It examines the key political factors that prompted the formation of these funds while also considering their resilience and performance to date.

ENTREPRENEURSHIP AND THE INFORMAL ECONOMY: AN EMPIRICAL ANALYSIS

This paper presents an empirical study investigating the effect of entrepreneurship on the incidence of informal employment. It builds upon economic models exploring the determinants of informal economy by analyzing the role played by institutions and policies and their effect on the informal sector. Among policies examined are payroll and severance taxes, labor and product market regulations, unemployment benefits, firing and hiring costs, enforcement of financial contracts and financial costs. The empirical analysis is based on a panel data approach. The main result of the paper supports the view that the informal sector is an “unregulated micro-entrepreneurial sector.” The findings suggest that differences in the level of entrepreneurial activities across developing countries are associated with variance in the incidence of informal employment, and that entrepreneurship has a positive effect on the informal sector. The incidence of informal employment is strongly affected by the public perception of government performance, role, accountability and effectiveness, as well as labor market and business regulations.

The Review of Legislative Initiatives as Regards Taxation Issues in Q2 2016

In April–June 2016, lots of proposals on taxation in Russia were developed. The attention was focused on all the main taxes, including the individual income tax, corporate profit tax, property taxes, including the transport tax, the severance tax and the gambling tax. Also, a decision was approved to expand access of small business entities to the simplified scheme of taxa on. However, the reform of the system of administration on of insurance contributions to the mandatory social insurance should be recognized as one of the most fundamental and large-scale changes.

Steam Coal at an Arm's Length: An Evaluation of Proposed Reform Options for US Coal Used in Power Generation

The ONRR has proposed to reform federal coal valuation policy for royalty assessment and in this paper we estimate the expected changes associated with different reform options. We find that if royalty revenues are determined using the delivered price of coal instead of prices used in non-arm’s length transactions, royalty revenues from domestic sales to power generators would increase by $141 million per year. The associated price effect is an increase of 23 cents per ton (0.89%) and the effect on the quantity is a decrease of 971 thousand tons per year (-0.17%). In addition to using delivered prices for royalty valuation if transportation costs that exceed 50% of the net delivered price are included in royalty payments, royalty revenues from domestic sales to power generators are expected to increase by $517 million per year. This change would increase the average price of coal by 88 cents per ton (3.36%), decrease the quantity extracted by 3.7 million tons per year (-0.65%), and reduce severance and income tax collections by $13 million per year.

Taxing Fracking: The Politics of State Severance Taxes in the Shale Era

AbstractStates producing gas and oil have long levied severance taxes at the point of extraction, commonly placing most revenues into general funds. These taxes have assumed new meaning in many states amid the expansion of gas and oil production accompanying the advent of hydraulic fracturing. We reviewed all major statutes and constitutional amendments related to severance taxes that were enacted at the state level during the first decade of the “shale era” (2005–14). There have been only modest adjustments in statutory tax rates and some evidence that states have attempted to reduce these rates, possibly in response to growing national production. In turn, there is also evidence that states have begun to pursue more targeted strategies for revenue use, including some expanded focus on responding to the negative externalities linked to drilling, expanded revenue sharing with localities, and increased long‐term protection of resources through state trust funds.

Will Reducing Oil Taxes Spur Production? The Critical Question in Alaska's FY 2014 Budget Process

Among western states, Alaska is the most dependent on oil/gas taxes. In late 2012 and early 2013 the its counter-cyclical economy puttered along while oil production (taxes from which provide 87 percent of the state general fund budget) continued to decline. The main fiscal issue during the 2013 legislative session was oil severance taxes, with Governor Parnell making his second attempt (with Republican support) to lower them in hope that the industry would increase its investment in the state, thereby increasing production. A solid Republican bias on the state's redistricting board led to the electoral defeat of Democrats in the Bipartisan Working Group that had fouled the governor's previous attempt. In April 2013 the legislature adopted the governor's plan. Inter-branch and government-public discussions about the operating, capital and supplemental budgets were generally congenial, with a decline in growth of the operating budget and a significant cutback in the capital budgets.

Government Size and Tax Evasion: Evidence from China

AbstractThis paper investigates how government size affects tax evasion in China. Using matched county‐firm data for 1998–2005, we estimate the impact of county government size on the relationship between a firm's reported profit and imputed profit based on the national income accounts. A larger government is found to be correlated with more severe tax evasion, especially for state‐owned and collectively‐owned firms. Such an effect is stronger when local governance become worse. This paper shows that a large government does not bring about a strong state capacity to enforce tax rules at the local level in China.

A Natural Gas Severance Tax—An Economic Analysis

AbstractThis study estimates the economic effects of a severance tax on the market for natural gas produced from shale sources using non‐conventional extraction methods, such as horizontal drilling and fracking. Results suggest that a severance tax of 5 % would increase the price of natural gas by as much as 3.82 % and decrease gas extraction by an estimated 1.16 % to a value of 9.52 %. If applied to the Commonwealth of Pennsylvania in the United States, a 5 % severance tax is estimated to raise between US $443 and $486 million per year in public revenue. The marginal deadweight loss associated with a 5 % severance tax is estimated between 1.27 % and 12.85 % of the last dollar earned. The burden of this tax falls on both producers and consumers and depends upon the underlying assumptions made regarding the price responsiveness of consumers and producers. Under plausible assumptions, a family consuming 1000 MMcfs (≈2.8×104 m3) per year of natural gas is estimated to pay an additional $100 per year after the implementation of a 5 % severance tax.

The Economic Contribution of CO2 Enhanced Oil Recovery in Wyoming 2010-2012

Wyoming’s economy and state & local government budgets depend heavily on the state’s mineral wealth. Mineral related payments are roughly 65% of Wyoming State revenues, with severance taxes and royalties alone accounting for 51% of the State budget. The recent strength of oil prices relative to other minerals has brought the importance of Wyoming’s CO2 enhanced oil recovery industry to the forefront, with state oil production trending higher after decades of decline. Collectively, the WY oil units with active CO2 floods produced 23.35 million barrels of oil from 2010-2012, 14% of Wyoming crude production during that time, of which 20.43 million or 12.2% of production is attributable to the CO2 injection. Utilizing the regional input-output (IO) economic model, IMPLAN, we estimate that from 2010-2012 the CO2-EOR projects in Wyoming supported an average of 1,914 jobs annually. Ignoring the capital investments and thinking in terms of ongoing oil production, 188 jobs were supported for every 1 million barrels of incremental oil produced.

Multiple well lease decomposition and forecasting strategies

Oil and gas production in the United States is frequently reported on a lease or unit basis. Leases and units with more than one well pose special problems in forecasting because individual well profiles must be inferred based on well tests and the aggregate production of the lease or unit. The purpose of this paper is to develop and compare decomposition procedures for multi-well leases based on decline curve and fixed allocation techniques. Decline curve techniques use the production profile of the multi-well lease to decompose and separate the individual well profiles, while a fixed allocation method samples the lease production profile at specific points in time to allocate production between wells. Using three multi-well lease examples from Louisiana׳s Haynesville shale, we compare the decline curve and fixed allocation methods and demonstrate that the techniques yield broadly similar results in severance tax exemption computations and estimates of expected recovery volumes. Leases that require alternative decomposition techniques are depicted.

Modeling the horizontal well severance tax exemption in Louisiana

The Haynesville shale is an unconventional resource play in Louisiana that requires significant capital expenditures to develop. To produce at commercial rates, shale gas wells are drilled horizontally and fractured to release their gas, and since 1994, a severance tax exemption on horizontal wells has been in effect, offering an incentive to investors to promote industry activity. In 2011, the Haynesville shale contributed 60% to the state’s gas production, and the impact of the horizontal severance tax exemption on revenue collection has been significant. The purpose of this paper is to model the horizontal well severance tax exemption for Haynesville shale gas wells to quantify its impact and the manner in which severance tax revenues are split between the operator and government. We develop an analytic framework to value the tax exemption under prevailing production, cost, and price scenarios. We estimate that the 2011 inventory of Haynesville wells will generate between $1.2 to $1.5 billion in severance tax revenue throughout their lifetime with at least 64% accruing to the private sector. A discussion of policy issues and trade-offs in Louisiana’s horizontal severance tax exemption and implementation is provided.

A Severance Tax Revenue Forecast Model for Louisiana

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.