University of Michigan Gateway Ford School

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

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April 2015

Barry G. Rabe, University of Michigan, and Rachel Hampton, University of Michigan

Abstract

States 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” (2005-2014). 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.

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Keywords: Economy and Economic Development, Environment, Public Finance & Taxation

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