President Trump presented his vision for escalating the war in Iran on Wednesday evening, as crude oil prices breeched the $100 a barrel putting the world economy and some state budgets under stress.
"Oil price swings can reshape state budgets quickly, especially in oil-producing states that rely heavily on severance taxes," said Lucy Dadayan, principal research associate for the Tax Policy Center at the Urban Institute & Brookings Institution.
The comments come from a
According to the National Council of State Legislatures, thirty-four states levy some kind severance tax or fee charged on the extraction of oil or natural gas.
The states with a major dependence on severance taxes include Alaska, North Dakota, New Mexico, Wyoming, Oklahoma, West Virginia, Texas, Montana, and Louisiana.
According to numbers from Pew, North Dakota and Alaska both received more than 50% of their tax revenue from severance fees in fiscal year 2024.
The Alaska Department of Revenue rolled out a revised forecast last month showing a boost in state revenues to $6.5 billion from $6 billion.
Per a letter from the ADR, "In terms of oil prices, this forecast is being released during a period of historically high uncertainty given the conflict in Iran and related disruptions to oil markets."
"At this point, it is looking like the state may receive a temporary windfall from higher prices for the remainder of fiscal year 2026 and fiscal year 2027."
Alaska's state legislature is now taking a wait and see approach on moving forward with expenditures for prisons, roads, and disaster relief as they were planning on paying for them using reserve funds.
Boom and bust cycles can complicate budget cycles through delays in actually receiving the money.
"When prices rise, energy-producing states often see increases in severance tax collections, sometimes creating short-term revenue windfalls," said Justin Theal, a senior officer for the Pew Fiscal 50 Project.
"Production levels and timing lags can also affect how quickly those revenues appear."
Oil states know the drill and compensate for the cycles by socking some of the funding away for when prices return to normal.
"Alaska, Wyoming, and North Dakota, for example, have long-standing funds supported by mineral revenues, while New Mexico has built up sizable reserves in recent years as oil production increased," said Theal.
For states not charging severance taxes, price hikes in oil are multi-pronged drains on the economy.
"For state governments, rising inflation translates into higher costs across the board, from construction and infrastructure to public services and procurement," said Dadayan.
"Higher prices can also dampen consumer spending, reducing sales tax collections."
Several states are moving towards gas tax
In March Rep. Chris Pappas D- N.H. proposed getting the federal government involved with fuel taxes by introducing the Gas Prices Relief Act of 2026, which would suspend the federal gas tax through Oct. 1, 2026.
