Amid looming budget gaps and Governor Morrisey’s call for additional personal income tax cuts, tax cuts for the natural gas industry are moving through the West Virginia Legislature. SB 706 would cut the state’s severance tax on natural gas from 5 percent to 3.25 percent for newly drilled wells. The reduced rate would be in place for two years after a well is drilled, after which the rate would revert back to 5 percent. In addition, the bill would increase the local share of the natural gas severance tax from 10 percent to 15.5 percent, in an attempt to protect local governments from revenue losses. Due to the nature of West Virginia’s natural gas industry, even a temporary rate reduction could result in significant revenue losses for the state.
West Virginia currently levies a 5 percent severance tax on the value of natural gas produced in the state. Ninety percent of the revenue is used by the state government, while 10 percent is distributed back to county and local governments. In FY 2025, the state collected $228.0 million in natural gas severance tax revenue, with $22.0 million distributed to local governments.
While the purpose of the bill is to incentivize natural gas production by reducing the severance tax, natural gas production has been consistently growing in the state with the current rate, even with volatile swings in prices. Natural gas production has grown in West Virginia every year since 2004, even though the price has ranged from $3.20 per million cubic feet (mcf) to $10.32 per mcf during that time period. From 2008 to 2024, the price of natural gas fell from $10.32 per mcf to $4.38 per mcf, a decline of 57.6 percent. Despite the sharp decline in price, production in West Virginia increased by 120 percent during that same time period. The 5 percent severance tax is insignificant on production compared to changes in prices.
While SB 706 only applies to the first two years of production for newly drilled wells, this could still result in a significant loss of revenue compared to current law. Over 97 percent of oil and natural gas production in the state comes from horizontally drilled shale wells; an analysis of horizontal wells in Oklahoma found that half of a typical well’s projected lifetime oil and gas production will occur during its first three years, meaning the bulk of natural gas production in West Virginia would be taxed at a lower rate under SB 706.
With 97 percent of West Virginia’s oil and natural gas production coming from shale gas, and half of that production occurring in the first three years, a large portion of West Virginia’s production would be subject to the lower rate under SB 706, reducing revenue by tens of millions of dollars. Assuming that 50 percent of natural gas production would have been subject to the lower rate in FY 2025, total natural gas severance tax revenue would have been reduced by $36.1 million, an amount that would grow as production from shale wells continues to increase.
As natural gas production increases and personal income tax cuts continue to take their toll on state revenues, the natural gas severance tax is growing in importance to the state budget. From FY 2004 to FY 2014, the natural gas severance tax averaged 1.8 percent of the General Revenue fund. Between FY 2015 and FY 2020, that average increased to 2.3 percent, and since FY 2021 the natural gas severance tax has averaged 4.4 percent of of the General Revenue fund.
The severance tax is one of the most effective ways to ensure West Virginia benefits from its natural resource wealth. As a low-income state that is rich in natural resources, the revenue collected through the severance tax on resources like coal and natural gas plays an important role in funding education, health care, infrastructure, and other essential services provided at the state and local levels. Cutting the tax in a misguided attempt to incentivize production will only hurt the state’s ability to make those investments in our state and its people.
