The Effects of Oil and Gas Booms on State Revenues, Tax Burden, and Revenue Cyclicality

This dissertation investigates the effects of recent oil and gas booms on state revenues, tax burden, and cyclicality of state revenues. The diffusion of technological innovations in horizontal drilling and hydraulic fracturing, colloquially known as fracking, across states has enabled huge amounts of oil and natural gas to be extracted profitably from underground. The examination is pursued by way of panel data of 50 states during the period of 2000-2015 using aggregate data by drilling type. This research presents four distinct findings. First, there is suggestive evidence that revenues from oil and gas extraction have similar characteristics to intergovernmental grants. The regression analysis finds that state oil and gas revenues are complementary to existing state revenues, suggesting that oil and gas revenues have crowd-in effects on state revenues. Second, estimates from statistical analysis indicate that oil and gas development results in a slight increase in resident’s tax burden. The small increase in resident’s tax burden is contributed by part of oil and gas production consumed by residents of producing states. Third, consistent with the political climate on a booming industry, this study finds that the oil and gas industry would see an increase in its state tax liabilities once it experiences a boom. The regression results indicate that the growth rate of state tax revenues paid by the industry would be higher than that of the industry’s profitability. And finally, the revenue cyclicality of the energy states, regardless of whether they allow fracking or not, is not statistically different from that of non-energy states in the period of 2008-2015. This finding suggests that the resource boom does not affect the revenue cyclicality of the energy states. Several conclusions can be drawn from the results of this study. First, fracking has transformed traditionally non-oil and gas states into producing states that gain from increased oil and gas revenues. Nationwide, state oil and gas revenues would be lower than they actually are without revenues from fracking production. Second, this research provides a theoretical foundation to extend our knowledge of the flypaper effect associated with revenues from resource extraction. It also improves our understanding of state behavior in responding to increased revenues from extractive industry. Instead of reducing residents’ tax burden, the states treat oil and gas revenues simply to increase state revenues. This study also provides empirical evidence with regard to states’ ability to shift the cost of public service to a booming industry.