Oil and Gas Taxes: Federal, State, Severance, and Excise

Oil and gas taxes stack up at every stage from wellhead to gas pump: a 21% federal corporate income tax softened by industry-specific deductions, federal royalties on production from public land, federal excise taxes on both crude and refined fuels, state severance taxes on extraction, state and local fuel taxes at the pump, local property taxes on wells and pipelines, and a new federal charge on methane waste emissions that reaches $1,500 per metric ton in 2026. Producers absorb most of these costs; drivers pay the fuel excises directly.

Federal Corporate Income Tax

Oil and gas companies pay the standard 21% federal corporate income tax on net profits, the same rate any corporation pays. What separates the industry is a handful of tax code provisions that let producers recover enormous upfront costs faster than companies in other sectors.

Intangible Drilling Costs

Drilling a well eats up labor, fuel, and site preparation that leave nothing you can resell. The tax code treats these as intangible drilling costs and lets producers deduct them immediately rather than spread them over the well’s life.¹ An independent producer can write off 100% of them in the year they’re incurred.

Integrated companies, meaning those that both produce and refine, get a smaller break. They must reduce the deduction by 30%, taking 70% immediately and amortizing the rest over five years.²

Percentage Depletion

Because oil is finite, producers can deduct a depletion allowance similar to depreciation on a building. Independent producers and royalty owners can use percentage depletion, which is 15% of the gross income from a producing property regardless of what was originally invested.³ The rate can rise to 25% for marginal properties when crude prices fall below $20 per barrel.

Limits apply. The deduction can’t exceed 100% of the taxable income from a given property, and total depletion across all properties can’t exceed 65% of the taxpayer’s overall taxable income. A daily production cap of 1,000 barrels of oil, or its natural gas equivalent, also applies. Large integrated companies can’t use percentage depletion at all; they’re limited to cost depletion, which stops once the original investment has been recovered. Percentage depletion has no such cap and can keep running as long as the well produces income.

Corporate Alternative Minimum Tax

The Inflation Reduction Act of 2022 added a 15% corporate alternative minimum tax on corporations whose average annual adjusted financial statement income exceeds $1 billion over three years.⁴ For the largest producers, this floor claws back some of the savings from intangible drilling cost deductions and percentage depletion. Smaller producers don’t hit the threshold.

Federal Royalties on Public Lands

Oil pulled from federally owned land or offshore areas carries a royalty owed to the federal government. Royalties aren’t taxes; they’re payment for the right to remove a publicly owned resource. But they function as a per-barrel cost on top of everything else.

The Inflation Reduction Act raised the minimum royalty rate on new competitive onshore leases from 12.5% to 16.67% of production value for all competitive leases issued on or after August 16, 2022.⁵ Offshore leases on the Outer Continental Shelf have historically ranged from 12.5% to 18.75% depending on water depth and lease terms. Rates remain subject to legislative and administrative change, so producers should verify the rate written into their specific lease.

Federal Excise Taxes

The federal government levies two separate excise taxes on petroleum. One hits refined motor fuel by the gallon; the other hits crude oil by the barrel as it enters a refinery.

Motor Fuel at the Pump

Every gallon of gasoline sold in the United States carries a federal excise tax of 18.3 cents plus 0.1 cents for the Leaking Underground Storage Tank Trust Fund, for a total of 18.4 cents. Diesel is taxed at 24.3 cents plus the same 0.1-cent surcharge, totaling 24.4 cents.⁶ These rates have not changed since 1993.

Most of the revenue goes to the Federal Highway Trust Fund, which pays for highway construction, bridge repair, and mass transit.⁷ Consumers bear the full cost. It’s built into the price at the pump.

Per-Barrel Tax on Crude

A separate excise tax applies to every barrel of crude oil received at a U.S. refinery or imported as a petroleum product. It has funded two programs: the Hazardous Substance Superfund for toxic waste cleanup, and the Oil Spill Liability Trust Fund.⁸

The Oil Spill Liability Trust Fund financing rate expired on December 31, 2025. Unless Congress extends it, the only per-barrel tax remaining for 2026 is the inflation-adjusted Superfund rate of $0.18 per barrel.⁹ Before the expiration, the combined rate was $0.27 per barrel. The Superfund component adjusts annually for inflation.

State Severance Taxes

Most producing states charge a severance tax when oil or gas is pulled from the ground. The name reflects the idea that the resource is being permanently severed from the earth. For many resource-rich states, severance taxes are among the largest single sources of general revenue.

States use one of two methods. The ad valorem approach takes a percentage of the resource’s market value at the point of production, so the tax rises and falls with commodity prices. The unit-based approach charges a fixed dollar amount per barrel or per thousand cubic feet, regardless of price. Some states blend the two or apply different rates by production type or well age.

Rates vary widely. A few producing states impose no severance tax at all; others charge more than 10% of gross production value. Reduced rates or full exemptions often apply to low-producing wells. Federal tax law defines a “stripper well” as one producing 15 barrel equivalents or less per day, and many states use a similar threshold when granting production tax relief.³ Some jurisdictions also let producers credit local property taxes on oil and gas assets against their severance tax bill.

State and Local Fuel Taxes

Every state adds its own excise tax on gasoline and diesel on top of the federal rate. These run from under 10 cents per gallon in the lowest-tax states to over 70 cents in the highest. Several states apply a general sales tax on fuel as well. Combined with the federal tax, the total on a gallon of gasoline ranges from roughly 27 cents to nearly 90 cents depending on where you’re filling up. State fuel tax revenue is typically earmarked for highway construction and maintenance.

Property Taxes on Oil and Gas Assets

Counties, school districts, and special taxing districts levy property taxes on the physical infrastructure of the industry: pipelines, refining equipment, storage tanks, and the mineral rights themselves. In most producing states, the value of unextracted reserves counts as real property and gets reassessed each year as production volumes and commodity prices shift.

Assessors typically value a producing well through an income approach, estimating the present value of the expected future revenue stream from remaining reserves and discounting for time and production risk. Oil and gas property often faces a higher assessment ratio than residential property, so producing wells can generate outsized property tax revenue for local schools and county services where drilling is concentrated. That revenue also makes local budgets vulnerable to commodity price swings.

Methane Waste Emissions Charge

Starting in 2024, the Inflation Reduction Act imposed a federal charge on methane emissions from oil and gas facilities. It’s structured as a per-ton fee on methane escaping above facility-specific thresholds rather than a traditional tax, but for producers who can’t tighten their emissions, it operates as a direct cost.

The charge applies only to facilities that report more than 25,000 metric tons of carbon dioxide equivalent per year to the EPA’s Greenhouse Gas Reporting Program, and only to emissions above waste emissions thresholds that vary by industry segment.¹⁰ Production facilities face a threshold based on methane as a percentage of gas sent to sale; processing and transmission facilities face tighter intensity limits.¹¹

The rate escalates over its first three years: $900 per metric ton of excess methane in 2024, $1,200 in 2025, and $1,500 for 2026 and beyond.¹¹ At $1,500, a facility with significant excess emissions faces a bill that can dwarf its other extraction-related costs.

Carbon Capture Tax Credit

Not every provision adds cost. The Section 45Q credit rewards companies that capture carbon oxide and either store it permanently underground or use it in enhanced oil recovery. For tax years beginning in 2025 and 2026, the base credit is $17 per metric ton of qualified carbon oxide.¹² Facilities that meet prevailing wage and apprenticeship requirements qualify for a fivefold bonus, bringing the effective credit to $85 per metric ton. Direct air capture facilities receive a higher base credit of $36 per metric ton, or $180 with the bonus. After 2026, these amounts adjust annually for inflation.

For producers using captured carbon in enhanced oil recovery, the credit offsets injection costs while reducing net emissions. It has become a meaningful factor in the economics of new projects, particularly where enhanced recovery and permanent geological storage overlap.

1
Office of the Law Revision Counsel. 26 U.S. Code 263 – Capital Expenditures
2
Office of the Law Revision Counsel. 26 USC 291 – Special Rules Relating to Corporate Preference Items
3
Office of the Law Revision Counsel. 26 USC 613A – Limitations on Percentage Depletion in Case of Oil and Gas Wells
4
Office of the Law Revision Counsel. 26 U.S. Code 55 – Alternative Minimum Tax Imposed
5
Bureau of Land Management. Impacts of the Inflation Reduction Act of 2022
6
GovInfo. 26 USC 4081 – Imposition of Tax
7
U.S. Energy Information Administration (EIA). How Much Tax Do We Pay on a Gallon of Gasoline and Diesel Fuel?
8
GovInfo. 26 USC 4611 – Imposition of Tax
9
Internal Revenue Service. Section 4611 Oil Spill Liability Trust Fund Financing Rate Expiration
10
U.S. Environmental Protection Agency. EPA Finalizes Rule to Reduce Wasteful Methane Emissions and Drive Innovation in the Oil and Gas Sector
11
Federal Register. Waste Emissions Charge for Petroleum and Natural Gas Systems – Procedures for Facilitating Compliance, Including Netting and Exemptions
12
Office of the Law Revision Counsel. 26 USC 45Q – Credit for Carbon Oxide Sequestration