Severance taxes are taxes imposed on the removal of natural resources within a taxing jurisdiction. Severance taxes are most commonly imposed in oil producing states within the United States. Resources that typically incur severance taxes when extracted include oil, natural gas, coal, uranium, and timber. Some jurisdictions use other terms like gross production tax.
Note that severance taxes are used in jurisdictions where most resource extraction occurs on privately owned land and/or where sub-surface minerals are privately owned (for example, the United States). Where the resources are publicly owned to begin with (for example, in most Commonwealth and European Union countries), it is not a tax but rather a resource royalty that is paid. In the case of the forestry industry, this royalty is called "stumpage".
Most laws that affect oil production are created at the state level. Likewise, severance taxes are legislated and collected by each individual state. States usually calculate the tax based on the value or volume of the oil produced, though sometimes states use a combination of both. Certain oil wells may be exempt from severance tax based on the amount they produce, though this is determined by the individual states.
Severance tax incentives in the form of credits or lower tax rates in order to encourage the production and expansion of oil and gas operations.
Several U.S. states, including New Mexico, Wyoming, Colorado, Alaska and Montana, have created severance endowments. These range in size from about $800 million in Montana to more than $37 billion in Alaska. In theory, income from these permanent endowments remains available in perpetuity after resources are no longer being extracted.