science

Severance tax

Severance tax is a science topic covered in the lgStudy science library. This page brings together a partial reference excerpt, illustrations, worked examples, real-world applications and a short study plan, so you can understand Severance tax rather than just read about it. In short: 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.

Key takeaways

Severance tax belongs to science; place it in that map before memorising details.
Learn the definition first, then one example that makes the definition concrete.
Connect Severance tax to a quantity you can measure, compute or draw — that is where exam questions come from.
Reproduce the core statement of Severance tax from memory before moving on to harder problems.

Reference excerpt

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".

Oil and natural gas Severance taxes are set and collected at the state level. States usually calculate the tax based on the value and/or volume produced; sometimes the method differs for oil, natural gas, and condensates. Production from certain wells may be exempt from severance tax based on the amount of production (i.e. "stripper" wells) or the type of well (i.e. horizontal, tertiary, deep, etc). As of 2021, 34 states collect a severance tax on oil and gas extraction. As of September 2022, the Colorado severance tax was 1% of the gross income from oil and gas owed.

Incentives Severance tax incentives may be given in the form of credits or lower tax rates in order to encourage the production and expansion of oil and gas operations.

Endowments 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, and is generally used to support public education and other public programs.

See also Natural resources consumption tax Severance tax legislative history in California Stumpage

References

Further reading Vaughan, George (1922). "The Severance Tax and Kindred Exactions". The Southwestern Political Science Quarterly. 2 (4): 283–301.

External links Texas Severance Tax Incentives: Past and Present (Railroad Commission of Texas) Coal and Renewables in Central Appalachia: The Impact of Coal on the West Virginia State Budget (2010) Coal and Renewables in Central Appalachia: The Impact of Coal on the Tennessee State Budget (2010)

Worked examples

Example 1 — a first encounter with Severance tax

Start with the simplest possible case. Write down what Severance tax claims or describes in one sentence, then invent the smallest concrete situation in which that sentence is true. In science, the smallest case is usually a single object, a single equation or a single measurement. Check that every symbol or term in your sentence has a meaning in that case.

Example 2 — changing one variable

Take the situation from Example 1 and change exactly one quantity: double it, halve it, or set it to zero. Predict what should happen to Severance tax before you calculate. Comparing your prediction with the result is the fastest way to find out whether you understand the idea or only the words.

Example 3 — an exam-style question

Typical questions about Severance tax ask you to (a) state it precisely, (b) apply it to given data, and (c) explain a limitation. Practise writing all three answers in under five minutes; the third part is what separates a full-mark answer from an average one.

Applications of Severance tax

In research: Severance tax appears in science research whenever the underlying quantities have to be modelled precisely. Papers usually cite it as a starting assumption and then explore where it breaks down.
In technology and industry: Engineering practice reuses Severance tax in design rules, simulations and safety margins. Knowing the idea lets you read a specification sheet and understand why the numbers look the way they do.
In the classroom: Severance tax is common in secondary-school and first-year university syllabi. It links to neighbouring topics Economics of primary sector industries, Resource extraction, Severance taxes, so understanding it makes those chapters shorter.
In everyday life: Look for Severance tax outside the textbook — in sport, cooking, traffic, electronics or the sky above you. An example you found yourself is remembered far longer than one you were given.

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How to study Severance tax in 20 minutes

Read the reference excerpt below once, without taking notes.
Close the page and write down what Severance tax means in your own words.
Compare your version with the excerpt and mark what you missed.
Work through the three examples above with pen and paper.
Explain Severance tax out loud to somebody else — or to Teacher Smith in the lgStudy chat.

Frequently asked questions

What is Severance tax in simple terms?

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.

Why does Severance tax matter?

Because it connects several science ideas at once: it gives you a definition you can apply, a quantity you can calculate, and a way to check whether a result is plausible.

How should I study Severance tax?

Read the excerpt, restate it from memory, then work through the examples and applications listed on this page. The five-step study plan above takes about twenty minutes.

What does this page cover?

It gives you a compact reference excerpt plus original lgStudy explanations, examples, applications and study material on Severance tax.