University of Michigan environmental policy professor Barry Rabe looks at how states are responding to the first decade of extended development of oil and natural gas from shale deposits where federal involvement is limited. Rabe finds that states are reluctant to tax, but that may not last for long. Barry Rabe is an environmental policy professor at the University of Michigan’s Ford School of Public Policy and director of the Center for Local, State, and Urban Policy at the Ford School.
U-M Ford School Policy Points
Barry Rabe - Fracking Taxes
This study looks at severance taxes imposed at the state level on the extraction of energy. Severance taxes are imposed when a non-renewable, natural resource is extracted below the surface of the ground. A lot of mining activity has some form of a severance tax. So it's an old tax but taking on all kinds of new dimensions in the fracking era.
Almost all the states that drill for oil and gas, an activity that is now expanding because of fracking, impose some tax like this. There are 30 states that have some form of fracking policy, but historically these severance taxes have been quite popular politically. In fact, the rates tend to be highest in conservative states.
Alaska is really the grand-champion of this form of taxation. The state usually gets more than three-quarters of its total revenue from a severance tax or production tax. But an emerging concern now in Alaska is that with the competition that is emerging in the remaining parts of the U.S. because of fracking, does Alaska need to reduce its taxes to begin to compete?
I mean, we're producing a lot more gas, we're producing a lot more oil, we're not talking about scarcity nearly as much and so as states begin thinking strategically about harnessing that resource the attractiveness of keeping tax rates low becomes significant because there are more competitors in their own backyard.
We're not aware of any set of shale companies that have literally pulled up their drilling rigs and have gone somewhere else because of these tax changes. That being said, most of these rate changes have occurred in the last year or so, so it's a little bit early.
This also coincides with the fact that there has been such a spike in production that may be actually depressing the attractiveness of further development because the price is going down. In turn, that declining price may force states to think about how they want to approach this issue.