Federal Government Charges Lower Royalties Than Many States For Oil And Gas Drilling, Taxpayers Lose Out

A report released today by the Center for Western Priorities shows that taxpayers are potentially losing hundreds of millions of dollars from low royalty rates for oil and gas drilling on public lands. And, as seen in the graph above, many states charge a higher royalty rate than the federal government for drilling on their state-owned lands.

Royalties — a share in the profits from a particular product — from fossil fuels on public lands and waters are one of the federal government’s “largest nontax sources of revenue,” according to the Government Accountability Office. Last year, the federal government collected $2.5 billion in royalty payments from oil and gas leases on public lands, and a portion of these revenues go to states.

This means that the low federal royalty rate is not only depriving taxpayers of additional profits, but also states — today’s report estimates that increasing the federal royalty rate to 16.67 or 18.75 percent would send an additional $400 to $600 million to states in the Rocky Mountain West.

Raising the federal royalty rate is an executive action that does not require an act of Congress. The law states that the rate should be “not less than” 12.5 percent, but does not set an upper limit. And yet, that level has not been permanently raised since it was first set in 1920.


This is not the first time that an increase in the royalty rate for oil and gas from public lands has been proposed. Former Secretary of the Interior Ken Salazar explicitly advocated for it during his tenure.

Of course, the oil and gas industry has strongly fought against increasing the federal royalty rate, so that companies can retain more of the profits they make off of our taxpayer-owned resources. For context, it is important to remember that the largest five oil companies made $30.2 billion during the first quarter of 2013, the equivalent of $331 million per day.

The industry claims that higher royalty rates will stifle production and investment. However, the evidence shows that the industry decides where to drill based mostly on geology — where the oil and gas resources are located. As today’s report put it, “Economic data shows that small, yet meaningful differences in tax and royalty policy do not significantly affect oil and gas production.”