THE ECONOMICS OF SEVERANCE TAXES
ALBERT L. DANIELSEN and PHILLIP A. CARTWRIGHT
SEVERANCE TAXES HAVE BECOME MORE CONTROVERSIAL as the energy producing states have increased their tax rates to unprecedented levels. Montana has a 30 percent ad valorem tax on coal, and most other states have scaled their severance tax rates upward. The Montana severance tax has raised important constitutional issues related to equal protection and confiscation of property, without the due process of law. The economics of severance taxes have been discussed rigorously and at length. The purpose of this study is to present the basic economic theory, summarize the major issues, and outline some of the conclusions regarding who pays the tax and its effects on resource exploitation.
In general, the effects of the severance tax will depend on the market structure, externalities associated with resource exploitation, the level of taxation, and how the taxes are imposed. It is often implicitly assumed that the taxing jurisdiction can "export" the tax, but it will be shown that the requirements to do so are extremely restrictive, and, in general, much of the tax is likely to fall on the present generation of resource owners. However, the exact effects are problematic and should be discussed in the context of more or less formal economic models. This discussion shall do so, but in non-mathematical language and with a limited amount of economic jargon.