Severance tax

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A severance tax is a tax imposed by a state on natural resource producers, most commonly, oil, coal or natural gas producers.

The name comes from the idea that when natural resources are extracted from the land, they are being "severed." The idea behind a severance tax is that it can compensate present and future citizens of the state from which natural resources were extracted for the loss of those natural resources. For example, if coal is mined in one state and sold in another state, that coal could be taxed to pay current and future generations for the loss of the future opportunity to extract and use that coal. These taxes are also used to pay for the costs associated with the extraction of these resources, including road maintenance and environmental protection.[1]

Critics of severance taxes believe that the tax weakens incentives for the natural resource-based industries (coal, oil, natural gas companies) and hurts their competitiveness in national and international markets.[2]

At least 36 states impose some type of severance tax. Thirty-one states impose severance taxes on oil and natural gas producers. "In 2010, more than $11 billion was generated in the United States from severance taxes alone."[1]

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