State severance taxes’ reduction or elimination provides operators an economic incentive to undertake activities that produce oil and gas resources that otherwise might remain undiscovered. Black gold. Texas tea. Back in the 1980s’, The Lone Star state realized that incentives to increase the state’s oil and gas production were significantly valuable.  Economic studies have shown that there is a positive effect on the Texas’s economy for each dollar invested in the oil and gas industry for each dollar of production.

Prior to the mid-1980s (Think TV show Dallas) oil and gas bust, that sector was among the strongest in Texas’s economy. The industry weakened in the late-1980s and early 1990s, reflecting in the state’s economy. Incentive programs arose to help strengthen Texas’s economy by encouraging exploration investment and production and to bolster responsible development and efficiently recovery the state’s natural valuable resources.

The aforementioned incentive programs lower the cost of production by providing severance tax exemptions or reductions on oil and gas production.  For marginal operations specifically, these incentives might mean the difference between closing a well, keeping it in production, or bringing a well back into production. Incentives are factored into decisions to drill or not to drill for others, initiating an enhanced recovery project, or servicing an oil well to increase its production.

Texas incentive programs have been rather successful; so much so, that other states have used them as incentive models.  Severance tax incentives continue to be essential in the future to keep oil and gas production and expansion operations running like a well-oiled machine while sustaining a vital segment of the state’s economy.

Here’s a cheat sheet for the baseline Texas severance tax on oil and gas:

Bye for now,

State Tax Group, LLC is a state and local tax advisory and consulting services firm, specializing in sales and use tax consulting, audit representation, tax compliance, and more. For more information on how we can make state taxes smooth sailing for you, call us toll-free at 800.952.8996; and 972-239-5880 or visit