In this guide
What severance taxes are
A severance tax (in some states "gross production tax" or "production tax") is a state-level tax on the act of extracting oil and gas, imposed regardless of whether anyone earns a profit. Two designs dominate: value-based — a percentage of the production's market value at the wellhead (Texas, Oklahoma, Wyoming) — and volume-based — cents per barrel or per mcf, usually indexed annually (Louisiana gas, North Dakota gas, Ohio). A few states layer several small taxes into one effective rate (New Mexico stacks four), and Alaska stands alone with a net-profits-style tax that behaves nothing like the others.
The policy rationale is that minerals belong to the state's patrimony once severed, and the revenue typically funds schools, roads in producing counties, and permanent trust funds. For an investor the rationale matters less than the arithmetic: this is a top-line tax — it comes off gross revenue, before operating costs, before your income-tax math even begins.
Who effectively pays
The operator files the returns and remits the tax, but statute and lease practice pass the burden to everyone with a slice of production:
- Royalty owners: your proportionate share is deducted from your royalty check — you'll see it as a "severance tax" or "production tax" line in the check detail. Courts in producing states have consistently allowed this deduction even under leases that prohibit deducting post-production costs, because taxes aren't costs of marketing. If you own minerals or royalties, severance tax is simply part of your effective royalty rate.
- Working-interest owners: your share of the tax is netted in the operator's revenue distributions or charged through joint-interest billing. In a drilling partnership it flows through the K-1 as a deduction against the program's revenue.
- Nobody escapes by structure: unlike the income-tax write-offs, which depend on how you hold the interest, severance tax is ownership-blind. The state taxes the barrel, then everyone splits the bill pro rata.
The state-by-state rate table (2025–26)
Headline rates for the 17 states below were checked against state revenue department and legislative sources in July 2026. Effective rates on any given well can differ substantially because of the exemptions column.
| State | Oil rate | Gas rate | Notable exemptions / incentives |
|---|---|---|---|
| Alaska | 35% of net value, less sliding per-barrel credit (up to $8); 4% gross-value minimum floor (2025) | Special regimes (Cook Inlet) | Net-profits design — not comparable to gross-value states; credits phase out as prices rise |
| Arkansas | 4% (wells averaging ≤10 bbl/d); 5% above (2025) | 5% standard (2025) | Gas: 1.5% for high-cost wells (first 36 months), 1.25% marginal; small per-barrel fees on oil |
| California | No severance tax; annual CalGEM regulatory assessment (≈$1.01/bbl, FY2024–25, reset each June) | Same assessment per 10,000 cf | The real burden is county property tax on reserves — see the ad valorem guide |
| Colorado | 2–5% graduated on gross income (2025) | 2–5% graduated (2025) | Stripper wells (≤15 bbl/d oil, ≤90 mcf/d gas) exempt; credit for 75% of ad valorem taxes paid (2024–25 tax years) |
| Kansas | 8% (2025) | 8% (2025) | 3.67% ad valorem credit → ~4.33% effective; low-price/low-volume exemptions (gas exemption in effect for FY beginning 7/1/2025) |
| Louisiana | 12.5% (wells completed before 7/1/2025); 6.5% (completed after — Act 295 of 2025) | 10.52¢/mcf (7/1/2025–6/30/2026; indexed annually) | Stripper oil 3.125%; incapable oil 6.25%; horizontal-well exemption until payout or 24 months |
| Mississippi | 6% of value (2025) | 6% of value (2025) | Reduced rates for EOR and certain newly drilled/discovery wells |
| Montana | 0.5% first 12 months (vertical) / 18 months (horizontal), then ~9% working interest (2025) | Same holiday structure (2025) | Non-working (royalty) interests taxed at a higher schedule (~14.8%); stripper rates 0.5–6%; tax is in lieu of property tax on production |
| New Mexico | ~8.5–9% combined: 3.75% severance + 3.15% emergency school + 0.19–0.24% conservation + ad valorem production (~1–1.5%) (2025) | ~9.4% combined: 3.75% + 4.0% school + 0.19% + ad valorem (2025) | All collected together through the operator; price-triggered reductions for stripper and EOR production |
| North Dakota | 10% combined: 5% gross production + 5% extraction (2025; the 6% high-price trigger was repealed for most wells — retained only for tribal and straddle wells) | $0.0555/mcf (FY ending 6/30/2026; indexed annually) | Stripper wells exempt from the 5% extraction tax; various new-well and workover incentives |
| Ohio | $0.10/bbl (2025) | $0.025/mcf (2025) | Regulatory cost-recovery assessment roughly doubles each; among the lightest severance loads of any producing state |
| Oklahoma | 5% first 36 months of production, then 7% (2025) | 5% first 36 months, then 7% (2025) | Plus ~0.095% petroleum excise; gross production tax is in lieu of county ad valorem on production |
| Pennsylvania | No severance tax | Act 13 impact fee per unconventional well: $59,700 year 1 declining to $12,100 in years 11–15 (CY2025 schedule) | Fee varies with gas price and well age, not production volume; conventional wells pay no fee |
| Texas | 4.6% of market value (2025); condensate 4.6% | 7.5% of market value (2025) | High-cost gas reduced rate (0–7.5%); two-year inactive well exemption; new 2025 restimulation exemption (HB 3159, up to 36 months) |
| Utah | 3% of value up to $13/bbl, 5% above (2025) | 3% up to $1.50/mcf, 5% above (2025) | Plus 0.2% conservation fee; stripper-well exemption; 6- and 12-month exemptions for development and wildcat wells |
| West Virginia | 5% (2025) | 5% (2025) | Low-volume and marginal vertical wells reduced or exempt (mid-volume wells not taxable for TY2025); rate-cut legislation pending in 2026 |
| Wyoming | 6% (2025); stripper oil 4% | 6% (2025) | County gross products (ad valorem) tax adds roughly 6–7% more — ~12% combined at the wellhead |
Verify before you rely. Severance rates, triggers, and exemptions change with legislative sessions and price formulas — several rates above are re-set every July 1. Confirm the current figure with the state revenue department (links in the sidebar) or a licensed tax professional before using any rate in an investment decision or tax filing. This table is educational, not advice.
The big producing states, in detail
Texas keeps it simple and stable: 4.6% on oil, 7.5% on gas, unchanged for decades, administered by the Comptroller. The action is in the exemptions — the high-cost gas reduced rate scales a well's rate down (potentially to zero) based on its drilling and completion costs relative to the statewide median, and 2025's HB 3159 added an exemption for restimulated inactive wells (up to 36 months of relief, capped at $750,000 of recovered cost). Note the asymmetry investors miss: Texas gas is taxed at a higher statutory rate than oil, but high-cost designations mean many shale gas wells pay well below 7.5%.
New Mexico is the stacking champion: severance tax (3.75%) + emergency school tax (3.15% oil / 4.0% gas) + conservation tax (0.19%, rising to 0.24% on oil when WTI exceeds $70) + an ad valorem production tax collected through the same system. The all-in wellhead load runs roughly 8.5–9.5%. Permian royalty owners see all four lines on their check details.
Oklahoma charges its gross production tax at 5% for a well's first 36 months, then 7% — a structure that survived a 2025 recodification. Two investor-relevant features: a petroleum excise tax adds ~0.095%, and the gross production tax is expressly in lieu of county ad valorem tax on production, so Oklahoma royalty owners get no county property bill — one of the cleanest tax pictures among big producers.
North Dakota splits its 10% into a 5% gross production tax (in lieu of property tax) plus a 5% oil extraction tax. For years the extraction tax carried a "big trigger" — jumping to 6% if WTI stayed above an indexed price — but the legislature removed the trigger for most wells, leaving it only for designated tribal and straddle wells. Gas is taxed at a flat indexed rate, $0.0555/mcf for the fiscal year ending June 30, 2026. Stripper wells escape the extraction half entirely — a big deal for buyers of mature Bakken royalties.
Louisiana made 2025's biggest move: Act 295 (HB 600) cut the oil severance rate from 12.5% — the nation's highest — to 6.5% for wells completed after June 30, 2025. Legacy wells stay at 12.5%, so two identical-looking Louisiana royalty checks can now carry very different tax lines depending on completion date. Gas is volume-taxed at an annually indexed rate (10.52¢/mcf through June 2026), with steep discounts for inactive and orphan wells, and horizontal wells enjoy an exemption until payout or two years.
Wyoming looks moderate at 6% — until you add the county gross products tax, an ad valorem levy on the full taxable value of production at local mill rates that adds roughly another 6–7%. The ~12% combined load is among the nation's heaviest; the ad valorem guide covers the county half.
Exemptions and incentives that actually matter
- Stripper/marginal wells. Nearly every state discounts or exempts low-volume wells (commonly ≤10–15 bbl/d). If you're evaluating mature royalties, check whether the wells qualify — exemption status can add points to your effective yield and often decides whether a well stays economic.
- New-well holidays. Montana's 0.5% first-year rate, Oklahoma's 5% first-36-months, Louisiana's horizontal payout exemption, Utah's development-well windows: all mean early production — precisely when shale wells produce most — is taxed lightly. Front-loaded production plus back-loaded tax rates flatters year-one royalty checks; model the rate step-up.
- High-cost and deep-well designations. Texas high-cost gas and Arkansas high-cost gas can cut rates dramatically, but they require operator applications — an operator that doesn't bother is leaving your money on the table.
- Ad valorem credits. Colorado (75% of ad valorem for 2024–25 tax years) and Kansas (3.67 points) credit the county layer against the state layer — the two taxes interact, so never just add the headline rates.
Deductibility against federal income tax
Severance taxes are a cost of producing the income, so they are deductible in computing your federal taxable income — on Schedule E against royalty income, or within the K-1/working-interest accounting for direct investors. Because they're a production expense rather than a personal state or local tax, the SALT itemized-deduction cap does not apply. One subtlety: percentage depletion is computed on gross income from the property, so severance taxes reduce your taxable income but not your depletion base. A 7% severance tax therefore costs a 37%-bracket investor roughly 4.4 points after the federal deduction — painful, not catastrophic, and very different from the raw rate.
What investors should do with this
Three practical habits. First, read one full check detail per property you own — the severance lines tell you the state's take and whether incentive rates are being applied. Second, location-adjust your yield math: identical wells in Wyoming and Oklahoma differ by ~5 points of gross before anything else happens; our royalty calculator lets you set the tax haircut explicitly. Third, remember this is only Layer 2 — the three-layers overview shows how severance stacks with the county ad valorem layer and your income-tax write-offs, and which basins sit in which regimes.