by 
The Curious Bag
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States often institute a severance tax to make up for a budget shortfall. Texas ordered the first severance tax in 1905, and Louisiana and Michigan soon followed in the 1920s.
Identification
States levy a severance tax on anyone who drills for or takes nonrenewable natural resources, such as oil and coal, from public lands, according to Investopedia.
Considerations
The exact rates charged on any particular severance tax change depending on the state. Some states, such as Colorado, only charge a tax if a site takes a certain amount of resources.
Fun Fact
Severances taxes can make up a large portion of some state budgets. Alaska, for example, had 64.4 percent of its budget come from severance taxes in 2007.
Features
States tend to spend their severance tax funds on the general public welfare, usually wherever the drilling or mining sites are located. Others spend on dedicated projects. Virgina puts severance taxes into a Medicaid matching funds account.
Warning
Severance taxes are not a substitute for income tax. You still must pay federal and state (if applicable) taxes on the profits from natural resources. Severance taxes also apply even if you see a net loss.
Source:
Investopedia.com; Severance Tax
Natioanl Conference of State Legislatures; State Energy Revenues Update
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