1.Legal constraints on severance tax
Since major producer states and consumer states take different measures to benefit more form natural resources, they cause negative effect on social justice and economic efficiency. In the 1970s, the US and Canadian courts made important decisions on state/provincial resource taxes. Severance tax must be constrained by the Constitution if it stood in inter-provincial and international trade. The US Congress legislated to restrict severance tax rate at 12.5%. In practice, laws have limited control over state taxation on natural resources and courts step in only when there is obvious tax discrimination. States and provinces retain taxation power over natural resources. Provinces also have the right to collect royalties and control the development of natural resources. In addition, this constraint may force states to replace severance tax with other taxes.
1. Tax equalization
An alternative solution to the disparity of resource tax is to equalize taxes. Until the early 1980s, tax equalization program in Canada had been limited to transfer payment in accordance with taxation capacity with no regard to cost differentiation when provinces offer general public service. Before 1962, transfer payment was based on per capita tax (including personal income tax, corporate income tax and death duty) of the two provinces with the highest personal income. After 1962, resource tax was added. Two changes were made in this program in 1967. First 16 tax items instead of 4 items were included to work out per capita tax. Secondly, transfer payment to poor provinces was no longer based on per capita tax of the two provinces with the highest income but on national average tax including all tax items. The difference between national average tax revenue and that of a given province figured out at its real tax base and national average tax rate is the equalized transfer payment the province is entitled to. The number of tax items in this equation was expanded to 23 in 1972 and to 29 in 1977, covering almost all sources of non-debt and non-allocated revenues. Nine items were related to natural resources. In the equation of transfer payment, the nine items are treated differently so as to reduce the degree of inequality caused by natural endowments. (Robin Boadway and Frank Flatters, 1983)
However, since natural resources are extremely unevenly distributed in Canada and the U.S., it is still hardly effective for countries like Canada to try to solve the inequality of natural resources through general transfer payment program in current expense. To tackle seriously the disparity problem, measures more radical than the constraint on 12.5% severance tax rate in the U. S. and general transfer payment in Canada, must be taken. They must include (1) a ceiling on per capita resource tax; (2) resource producer states must share revenues from natural resources with consumer states; (3) expanding windfall-profit tax to other resources and other government revenues. Of course these three measures have different effects on the equity and efficiency of resource taxation, but any one of them will make breakthroughs in the constitutional tradition, let alone its impact on political reality.