State and Local Ad Valorem Taxation of Mineral Interests

Since subsurface minerals are usually severed from the surface (land) estate, unique problems are created for establishing the value of minerals for ad valorem taxation. All states having significant production of minerals levy either severance or property taxes (or both). The unique character of minerals makes valuation one of the most difficult processes for the assessor. The methods used vary by state. Because of the complexity, in many states the state government or private consultants determine value for local jurisdictions. The legal environment which governs the relationship between subsurface and surface owners influences the value and use of the land and the mineral. When full consideration is given, it is unlikely that the ad valorem taxation of mineral interests meets the criteria established by economists for what constitutes a “good tax”. This paper explores the ways used to value mineral interests, the legal environment and what this implies for tax policy.

Keywords: Property taxes, ad valorem, severance, minerals, oil, gas, coal, state and local taxes, appraisal, assessment, tax incidence and shifting