Shale Law in the Spotlight: Oil and Natural Gas Severance Taxes in the United States (Michigan, Alaska, Nebraska, and California)

Written by Chloe Marie – Research Fellow

This series addresses severance taxes on oil and natural gas imposed by various states, and this sixth article will review the severance tax systems for the states of Michigan, Alaska, Nebraska, and California. In prior articles, we addressed the severance tax systems for the states of Pennsylvania, Ohio, and West Virginia; for the states of Texas, Oklahoma, Louisiana, and Wyoming; for the states of North Dakota, Arkansas, New Mexico, and Colorado; for the states of Kansas, South Dakota, Montana, and Utah; and for the states of Indiana, Kentucky, Alabama and Mississippi.

Michigan

The Michigan legislature (MCL 205-301 to 317) provides for a tax on oil and gas severed from the Michigan soil at a rate of 5% of the gross cash market value of the total production of gas and at a rate of 6.6% of the gross cash market value of the total production of oil. Crude oil produced from stripper or marginal wells is taxed at a reduced rate of 4% of the gross cash market value of the oil total production. As of March 30, 2014, oil or gas produced from a carbon dioxide secondary or enhanced recovery projects also is taxed at a rate of 4% of the gross cash market value.

The Michigan Severance Tax Act also provides for a tax exemption for certain production from the Devonian or Antrim Shale.

At least $1,000 or 2% of the revenue received from the severance tax goes to the Orphan Well Fund created under Part 616 of the Natural Resources and Environmental Protection Act, while the remaining revenue is allocated to the state general fund.

Alaska

The state of Alaska levies an annual severance tax on oil and gas produced in the state with a production tax rate set at 35% of the production tax value of the oil and gas as of January 1, 2014. The Alaska legislation also states that oil and gas produced from leases or properties outside the Cook Inlet sedimentary basin that do not include land north of 68 degrees North latitude are taxed at a rate not exceeding 4% of the gross value where production started after December 31, 2012, and before January 1, 2027.

The state legislation provides for various credit programs, such as a carried-forward annual loss credit in the amount of 45% for lease expenditures incurred between January 1, 2014, and January 1, 2016, relating to oil and gas developments located north of 68 degrees North latitude or in the amount of 35% for leases expenditures incurred on or after January 1, 2016. Other credit programs include the alternative tax credit for oil and gas exploration, oil or gas producer education credit, the qualified capital expenditure credit, the well lease expenditures credit, the transferable tax credit certificate, the transitional investment expenditure credit, the new area development credit, the small producer credit, the per-taxable-barrel credit, the Cook Inlet jack-up rig credit, the frontier basin credits, and the cash purchases of tax credit certificates.

On September 19, 2014, Alaska Governor Bill Walker signed into law Senate Bill 138 amending some provisions of the existing legislation, and providing new tax rates as of the year 2022. For oil and gas produced on or after January 1, 2022, the tax rate respectively would be equal to 35% of the annual production tax value of the taxable oil and 13% of the gross value at the point of production of the taxable gas.

Nebraska

In Nebraska, a severance tax is levied at a rate of 3% of the value of non-stripper oil and gas from state lands. The Nebraska Revised Statutes also provide for a tax preferential rate at 2% of the value of stripper oil severed from low producing wells as well as a tax exemption from the severance tax for the oil and gas used only in severing operations or for re-pressuring or recycling purposes.

All the revenue received from the oil and gas severance tax is credited to the Severance Tax Fund and then allocated based on whether the tax collected is coming from school or from all other lands. The balance of the Severance Tax Fund received from school lands is deposited in the permanent school fund and the balance of the Severance Tax Fund received from all other lands is distributed as follows:

-          1% is distributed to the Severance Tax Administration Fund;

-          Up to $300,000 goes to the State Energy Office Cash Fund;

-          Up to $300,000 is credited to the Public Service Commission for administration of the Municipal Rate Negotiations Revolving Loan Fund; and

-          The remaining money is distributed to the Permanent School Fund.

California

According to the California Department of Conservation, there is no severance tax imposed on oil and gas production in California, but there is an assessment on oil and gas produced within the state. The oil and gas assessment rate is based on the Division of Oil, Gas, and Geothermal Resources’ (DOGGR) estimated budget for the ensuing fiscal year and the total amount of assessable oil and gas produced during the prior year. For fiscal year 2017/2018, the oil and gas assessment rate is 50.38349 cents per barrel of oil or 10 Mcf of natural gas produced. The DOGGR states that this rate represents “an increase of 14.12298 cents from the previous fiscal year.”

Under Art. 7, Division 3 of the Public Resources Code, the revenue received from this assessment must be used exclusively for the support of the DOGGR, the State Water Resources Control Board and the regional water quality control boards, and the State Air Resources Board and the Office of Environmental Health Hazard Assessment for their oil and gas related activities.