Texas Oil Policy: Low Taxes, No Permanent Savings to Offset Volatility

Summary Findings

• The state’s low base tax rates result in a relatively low effective tax rate of 6.7 percent, ranking sixth of seven oil-producing states we compare. Oil production in Texas is taxed at the state level through a single production tax, and at the local level where local governments levy property taxes on the value of oil reserves. Texas does not offer any specific incentives for unconventional oil production.(see Figure 1 below).
• The state does not have permanent savings or impact grants programs funded with oil production revenue to help manage timing and distribution issues at the local level (see Figure 2 below).
• The state severance tax is collected monthly, minimizing the lag between production and revenue collections. Local governments reliant on annually assessed property taxes must wait longer to realize revenue. Reliance on property taxes also can create a mismatch between where revenue accrues and where impacts must be mitigated, often in adjacent cities and counties that do not host drilling and production activity, and so cannot collect revenue directly from production.

Figure 1. Comparison of Production Tax Revenue Collected from a Typical Unconventional Oil Well

Figure 2. Comparison of Distribution of Production Tax Revenue from a Typical Unconventional Oil Well

Background

Unconventional oil is extracted from tight shale formations using horizontal drilling and hydraulic fracturing technologies. The focus on unconventional oil is important as horizontal drilling and hydraulic fracturing technologies have led a resurgence in oil production in the U.S. Unconventional oil plays require more wells to be drilled on a continuous basis to maintain production than comparable conventional oil fields. This expands potential employment, income, and tax benefits, but also heightens and extends impacts on communities and public costs.

State and local governments levy different types of production taxes, at different rates, and offer a complex array of exemptions, deductions, and incentives. The various approaches to taxing oil and natural gas make comparisons between states difficult, although not impossible. This report applies each state’s fiscal policy, including production taxes and revenue distributions, to a typical new unconventional oil well over ten years of production. This allows for a comparison of how states tax oil extracted using unconventional technologies, and how this revenue is distributed to communities over time.

To provide a simple framework for the comparison, we assess state production tax policies on four criteria: the amount, time, location, and predictability of revenue distributions to local governments where extraction and associated impacts occur. We also provide a summary of the methods and data used to compare state fiscal policies.

The various approaches to taxing oil make comparisons between states difficult, although not impossible. To compare states, we apply each state’s fiscal policy, including production taxes and revenue distributions, to a typical unconventional oil well. This allows for a comparison of how states tax oil extracted using unconventional technologies, and how this revenue is distributed to communities.

We hope these data and resources will be useful to states and communities with unconventional oil development that are trying to mitigate the short-term impacts of oil extraction while making investments in long-term economic development opportunities.