Severance Tax in Texas: Complete Guide 2026
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Severance Tax in Texas: Complete Guide 2026
Tax information is for educational purposes only and does not constitute tax advice. Consult a licensed tax professional for your specific situation.
Texas imposes severance taxes on the production of oil, natural gas, and other natural resources extracted from the ground. As the largest oil and gas producing state in the nation — accounting for approximately ~40% of total U.S. crude oil production and approximately ~25% of natural gas production — severance tax revenue is a critical component of the state budget. In fiscal year 2025, Texas collected approximately ~$8 billion to ~$10 billion in oil and gas production taxes, representing roughly ~10% to ~14% of total state tax revenue. With no state income tax, Texas relies heavily on severance taxes alongside sales tax and property tax to fund government services.
Texas Severance Tax Rates (2026)
Oil Production Tax
| Component | Rate |
|---|---|
| Standard oil production tax | ~4.6% of market value |
| Oil regulation tax | ~3/16 of ~1% (~0.1875%) of market value |
| Total effective oil tax | ~4.7875% |
Natural Gas Production Tax
| Component | Rate |
|---|---|
| Standard gas production tax | ~7.5% of market value |
| Gas regulation tax | ~1/30 of ~1% (~0.0333%) of market value |
| Total effective gas tax | ~7.5333% |
Revenue Breakdown (Projected 2026)
| Source | Projected Annual Revenue |
|---|---|
| Oil production tax | ~$6 billion to ~$8 billion |
| Natural gas production tax | ~$2 billion to ~$3 billion |
| Condensate and other | ~$200 million to ~$400 million |
| Total projected | ~$8 billion to ~$11 billion |
Revenue fluctuates significantly with commodity prices. When oil prices average approximately ~$70 to ~$80 per barrel, oil production tax revenue is substantially higher than during periods with prices below approximately ~$50.
How Texas Severance Tax Works
Oil Production Tax
The Texas oil production tax is approximately ~4.6% of the market value of oil produced, plus a regulatory assessment of approximately ~0.1875%. Market value is determined at the point of production (the wellhead or lease), not at the refinery or delivery point. The Comptroller of Public Accounts administers the tax and receives monthly reports from producers. Oil is taxed regardless of whether it is sold on the open market, consumed by the producer, or transported out of state.
Producers may claim a reduced rate of approximately ~2.3% for oil from qualifying low-producing wells (commonly called “stripper wells”) that produce ~15 barrels per day or less. Enhanced oil recovery projects may also qualify for reduced rates or credits designed to encourage continued production from mature fields.
Natural Gas Production Tax
Natural gas is taxed at approximately ~7.5% of market value, a higher percentage than oil but applied to a lower-value commodity per unit. The natural gas production tax applies to all gas produced in Texas, including associated gas produced alongside oil, non-associated gas from gas wells, condensate, and casinghead gas. Gas used for operations on the lease (such as powering equipment) may be exempt from the production tax.
High-cost gas wells, defined as wells deeper than approximately ~15,000 feet, may qualify for a reduced tax rate or a tax credit for a designated period after production begins. This incentive encourages drilling in geologically challenging formations.
Reporting and Payment
Producers file monthly production reports and tax payments with the Texas Comptroller. The reports must detail production volumes, market values, lease identifiers, and any claimed exemptions or reduced rates. Payments are due on the ~20th of the second month following the production month (for example, January production tax is due by March ~20th). Late payments incur penalties of approximately ~5% plus interest at approximately ~1% per month.
Economic Stabilization Fund (Rainy Day Fund)
A significant portion of Texas severance tax revenue flows into the Economic Stabilization Fund, commonly known as the “Rainy Day Fund.” By law, approximately ~75% of oil and gas production tax revenue exceeding 1987 baseline collections is transferred to this fund. The Rainy Day Fund balance has grown to approximately ~$20 billion to ~$25 billion, making it one of the largest state reserve funds in the nation.
Comparison to Other Oil-Producing States
| State | Oil Tax Rate | Gas Tax Rate | Annual Revenue (Projected) |
|---|---|---|---|
| Texas | ~4.6% | ~7.5% | |
| Alaska | ~35% net (production tax value) | ~35% net | |
| North Dakota | ~5% extraction + ~6.5% gross production | ~6.5% | |
| New Mexico | ~3.75%—~4.56% | ~3.75%—~4.56% | |
| Wyoming | ~6% | ~6% | |
| Oklahoma | ~2%—~7% (varies by well type) | ~2%—~7% |
Texas has moderate rates by national standards but generates the most total revenue due to its massive production volume.
Tips for Producers and Mineral Owners
- Track commodity price fluctuations closely. Your severance tax liability is directly tied to market value at the wellhead. A ~$10 per barrel swing in oil prices changes your tax obligation by approximately ~$0.46 per barrel.
- Claim reduced rates for qualifying low-producing wells. The ~2.3% rate for stripper wells producing ~15 barrels per day or less can save approximately ~50% compared to the standard rate.
- Explore high-cost gas well incentives. Wells drilled below approximately ~15,000 feet may qualify for credits that reduce the effective gas production tax rate.
- File production reports accurately and on time. Penalties for late or inaccurate filings start at approximately ~5% of the underpayment plus monthly interest.
- Mineral owners: understand how severance taxes affect royalty payments. Severance taxes are typically deducted from the gross production value before royalty payments are calculated, reducing net royalty income.
- Monitor legislative changes. Texas periodically considers adjustments to severance tax rates and incentive programs, particularly during periods of volatile commodity prices.
- Consult a tax professional familiar with Texas oil and gas taxation. The interaction between federal depletion allowances, state severance taxes, and federal income tax rules requires specialized expertise.
Key Takeaways
- Texas imposes an oil production tax of approximately ~4.6% and a natural gas production tax of approximately ~7.5% of market value
- Severance tax revenue is projected at approximately ~$8 billion to ~$11 billion annually, representing roughly ~10% to ~14% of state tax revenue
- Reduced rates are available for low-producing stripper wells and high-cost gas wells
- A substantial portion of revenue flows into the Economic Stabilization Fund (Rainy Day Fund), with a balance of approximately ~$20 billion to ~$25 billion
- Texas generates the most severance tax revenue of any state due to its position as the nation’s leading oil and gas producer
- Severance taxes are typically deducted before mineral royalty payments are calculated
Next Steps
- See the full Texas tax picture at Taxes in Texas: State Tax Guide 2026
- Learn about self-employment tax for mineral owners at Self-Employment Tax Guide
- Compare state tax burdens at State Income Tax Rates Comparison 2026
- Calculate your federal bracket with the Tax Bracket Calculator 2026
- Get local help: Find a CPA Near You