The Incidence of Severance Taxes in a Residual Demand Framework

Although severance taxes are directly imposed on producers, the burden of the tax may be passed on to other parties. The incidence of a severance tax depends on the market structure, externalities associated with resource exploitation, the level of taxation, and how the taxes are imposed. This study focuses on tax incidence and the structure of the US and world oil markets, which is analyzed using a residual-demand model. More specifically, the authors assess the incidence of any increment in severance taxes on owners of oil reserves, given the present structure of oil markets. Within the residual-demand framework, the incidence of a severance tax is significantly different from that of a traditional supply and demand mechanism. 6 references, 3 figures.