Association for Public Policy Analysis & Management

This paper explores state fiscal policies for raising and allocating public revenue from oil and gas production in four major oil and gas producing states (Texas, Pennsylvania, Ohio, and California) to assess the extent to which public revenue from oil and gas production is distributed to local governments in proportion to production: that is, the benefit principle. I use a three-year average of oil and gas public revenue and total production value (2012-2014) to compare the percentage that flows to oil- and gas-producing local governments through four key policy mechanisms: (i) severance taxes or similar; (ii) local property taxes on oil- and gas-producing property; (iii) leases on state-owned land; (iv) leases on federally-owned land. I find that states that authorize local governments to tax oil- and gas-producing property (such as Texas and California) are consistent with the benefit principle, because local property tax revenue stays within the county in which the property is located. On the other hand, states in which local governments receive production-related revenue only through revenue sharing at the state-level (such as Pennsylvania and Ohio) are generally inconsistent with the benefit principle. The study’s findings are relevant to local leaders and state policymakers who are interested in understanding the efficiency and political feasibility implications of fiscal policies toward oil and gas production.