Severance fees are taxes on the removal of natural resources, not based on profit but on the total amount extracted. They vary by region and can be an important source of revenue for governments. Critics argue they can increase business costs, but studies show they do not deter production. Regions without severance taxes can lose potential revenue. In some cases, the fees may be paid by the initial consumer, resulting in a slight increase in overall costs.
A severance fee is a tax levied on the basis of the embezzlement of natural resources. The tax is not based on the profit made by producers and partners, but rather on the total amount of resources withdrawn. In some regions, taxes are collected on a graduated scale, so small producers are not taxed at the same rate as producers extracting large volumes of natural resources. Severance taxes vary by region, with some areas charging no taxes at all, while others may charge a variety of taxes related to the removal of natural resources, including oil and gas taxes, coal taxes, fishing taxes and timber taxes.
For regions where natural resource exploitation accounts for a large chunk of the economy, severance fees are an important way to support government operations, including paying to regulatory agencies that monitor the removal of natural resources. This tax may be charged in addition to other taxes relating to the use of natural resources. An oil drilling company, for example, may pay a severance tax on all oil removed, as well as pay income taxes on profits from oil production.
Critics of severance fees argue that they have a chilling effect on businesses in one region, making business costs higher than in other areas. Studies seem to suggest that this is not the case, as the existence of a severance tax is not linked to lower production levels or a reluctance to do business. Companies that exploit natural resources cannot simply relocate their operations, as they have to work in an area where those resources are available. In a region with ample resources, severance fees do not create disincentives for businesses, as they are generally set very low and do not dent profits.
Regions without severance taxes can experience significant losses in potential revenue. Studies commissioned in regions where such taxes are non-existent or resource-limited show that the implementation of a severance tax could generate large government revenues, and this revenue could help pay for costs associated with resource extraction industries, as well as the expenses of the general government.
In some regions, instead of being paid by producers, severance fees may instead be paid by the initial consumer of the resources. The severance tax is structured into the price of the raw resources. This can result in a pass-through of the price to end consumers, a slight increase in overall costs, and can be a cause for concern in areas with high prices for commodities such as oil and gas.
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