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Severance tax

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A severance tax is a tax imposed by a state on the extraction of natural resources (most commonly, oil, coal or gas) that will be used in other states.

The name comes from the idea that when natural resources are extracted from the land, they are being "severed." The idea laying behind a severance tax when an individual or corporation, for example, extracts coal from the ground in one state and then transports it to another state for sale, is that a tax on that sale can to some extent compensate the present and future citizens of the state for what some see as the state's "loss" of the coal.

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

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