The Incidence of State Taxes on Oil and Gas

The rising economic value of Outer Continental Shelf (OCS) waters, for oil and gas as well as wind farms, has attracted the attention of abutting states. Thus Louisiana, faced with dwindling revenues from the oil and gas severance tax and high costs of reconstruction after Hurricane Katrina, is again considering the merits of an oil and gas processing tax that would tax OCS production. Such a tax was proposed in 1998, to be levied at a rate of $1.15 per barrel on oil and $0.06 per thousand cubic feet on natural gas. Using a multiequation partial equilibrium model, the authors show that revenue would rise by $1.5 billion in the short run but just $0.2 billion in the long run. The important general finding is that even with a clever tax, it is difficult for a state to appropriate resource rents arising outside its boundaries. Proponents and opponents of the processing tax continue to make exaggerated claims; hence the authors’ second finding is that tax modeling remains essential to help generate light rather than heat.