Legal Definitions - severance tax

A severance tax is a tax imposed by a state or local government on the extraction or removal of natural resources from its land or waters. This tax is typically levied on the value or quantity of the resource "severed" from the earth, such as oil, natural gas, coal, timber, or minerals. The purpose of a severance tax is often to generate revenue for the government, compensate for the depletion of natural resources, or fund environmental protection and infrastructure projects in areas affected by resource extraction.

Here are some examples to illustrate how a severance tax works:

• Imagine a large energy company operating in a state known for its abundant natural gas reserves. When this company drills wells and extracts millions of cubic feet of natural gas from underground formations, the state government imposes a severance tax on each unit of gas brought to the surface. This tax might be a percentage of the market value of the gas or a fixed amount per thousand cubic feet. The revenue generated helps fund local schools and road maintenance in the gas-producing regions.

  This illustrates a severance tax because the tax is applied directly to the act of "severing" or removing a natural resource (natural gas) from its natural state in the ground.

• Consider a logging company that harvests timber from a vast forest in a particular county. As the company fells trees and transports the logs to a sawmill, the county government levies a severance tax on the volume of timber cut. This tax contributes to a county fund specifically designated for forest management, reforestation efforts, and maintaining public parks within the county.

  This example demonstrates a severance tax as it is imposed on the act of cutting down and removing trees, which are a natural resource, from the land.

• In a region rich in mineral deposits, a mining operation extracts tons of iron ore from an open-pit mine. The state government applies a severance tax based on the tonnage of iron ore removed from the ground. The funds collected from this tax are then used to support environmental reclamation projects in areas impacted by mining activities and to develop alternative industries as the mineral resources eventually deplete.

  Here, the severance tax is clearly shown as a charge on the act of extracting a natural resource (iron ore) from the earth, reflecting the depletion of the state's natural assets.