A recent Brookings Institution report calls on oil and gas producing states such as Louisiana to rethink how they are collecting and spending severance taxes derived from natural resources, Governing.com reports.
According to the website, the report’s authors say states can do a better job of channeling oil revenues to stable trust funds that better weather the boom-and-bust cycle of the oil and gas sector.
Most states rely little on severance or extraction taxes—usually less than 2% of total tax collections. But for the states with the largest oil reserves, the drop in oil prices has wreaked havoc on budgets.
“The consequences of inaction are especially visible now,” says Brookings senior fellow Mark Muro, who co-authored the report. “The bust period is the right time to look at this.”
Several state legislatures have weighed proposals to modify severance taxes or initiate new fees in recent years.
The Brookings report recommends that a portion of the states’ annual severance tax revenues be diverted to permanent trust funds, which encompass different types of investment products and are intended for long-term use. Fund earnings can be used to fund projects or programs, while spending the principal is typically restricted. Along with those tied to severance taxes, trust funds have also taken the form of land grant funds to support public school systems in the U.S.
Eight states have established trust funds supported by severance taxes. For the most part, however, fund balances remain small relative to the amount of production that’s occurred in those states over a number of years. Consider the North Dakota Legacy Fund, which has a market value of approximately $3.2 billion, or Alabama’s $2.5 billion fund.
