Oil and Gas Severance Tax by State: What Owners Pay

If you receive royalty checks from oil and gas production, you have probably noticed a line-item deduction for "severance tax" or "production tax." This is a state-level tax on the extraction of natural resources, and it directly reduces the net royalties you receive. This guide explains how severance taxes work, how much they are in each major producing state, and what mineral owners should know.

How Severance Tax Works

A severance tax is levied by the state on the value of oil and gas produced within its borders. The tax is called a "severance" tax because it applies when resources are severed (extracted) from the ground. In most states, the operator calculates the tax based on gross production value and deducts each royalty owner's proportionate share before distributing payments.

As a mineral owner, you typically do not pay the severance tax directly — it is withheld by the operator and remitted to the state. However, it reduces your net royalty income, so understanding the rate in your state is important for financial planning.

Severance Tax Rates by State

The following table summarizes severance tax rates for major oil and gas producing states. Note that rates may change, and some states have exemptions, credits, or additional levies not captured here.

How Severance Tax Appears on Your Royalty Check

Your monthly royalty check stub typically itemizes:

• Gross revenue: Your decimal interest multiplied by production volume multiplied by commodity price

• Severance tax: Your share of the state severance tax (deducted from gross)

• Other deductions: Post-production costs, if permitted by your lease (gathering, processing, transportation)

• Net payment: The amount you receive after all deductions

If you are unsure whether the severance tax deduction on your check is correct, you can verify the rate against your state's published schedule and compare the deducted amount against your gross revenue.

Ad Valorem Taxes: The "Other" Production Tax

In some states — particularly Wyoming, Montana, and parts of Oklahoma — mineral owners also bear a share of ad valorem (property) taxes assessed on the production value of active wells. Ad valorem taxes are separate from severance taxes and are levied by the county rather than the state.

In Wyoming, for example, the combined burden of severance tax (6%) and average ad valorem tax (~6.9%) means that approximately 12.9% of gross production value is deducted in taxes before royalty payments. This is important to understand when comparing royalty income across states.

States With No Severance Tax

A small number of producing states do not levy a traditional severance tax:

• Pennsylvania: Despite being one of the largest natural gas producers, Pennsylvania collects an annual per-well impact fee rather than a percentage-based severance tax

• Several minor producing states: Some states with minimal production do not impose severance taxes, though this may change as production levels evolve

How Severance Tax Affects Mineral Valuations

When a buyer evaluates your mineral interest, they project future net royalty income — which means after severance taxes and any other deductions. Higher severance tax rates reduce net cash flow, which in turn can reduce the price a buyer is projected to pay.

For example, the same mineral interest producing $1,000/month in gross royalties would have different net values depending on the state:

• Texas (4.6% oil): ~$954/month net of severance tax

• Wyoming (6% + 6.9% ad valorem): ~$871/month net of both taxes

• Louisiana (12.5% oil): ~$875/month net of severance tax

These differences compound over the life of a well and are factored into mineral valuations. Values depend on many factors and can go up or down.

Tax Deductibility

The severance tax deducted from your royalty income is generally deductible on your federal income tax return. It is typically reported as a production tax expense on Schedule E (Supplemental Income and Loss). Additionally, you may be eligible for a depletion allowance on your royalty income, which can further reduce your tax liability.

We recommend consulting a qualified CPA who specializes in oil and gas taxation for guidance on your specific situation. For a broader overview of mineral rights taxation, see our guide on mineral rights tax implications.