Pennsylvania Gov. Tom Wolf (D) is proposing a $2.5 billion net tax increase as part of his 2015–16 budget. These tax hikes include a new 5 percent severance tax on natural gas, calculated on the value of gas at the wellhead plus 4.7 cents per thousand cubic feet of gas extracted. Wolf estimates this tax increase would raise $765.3 million for the state’s general fund in its first full fiscal year, with a large portion of the proceeds being used to improve education funding.
Severance taxes are levied when landowners sell nonrenewable resources such as oil, natural gas, iron, and copper for extraction. These taxes are typically assessed on the gross value of the resource and are paid by the party extracting the resource. Revenues from the taxes are usually split between local governments, who are most affected by the development of the resource, the state’s general fund, and in some states, various education and environmental programs. Severance taxes on oil and gas generated $11 billion nationwide in 2010.
At least 36 states have some sort of severance tax, and 31 states specifically levy taxes on oil and natural gas development. Pennsylvania is the largest gas-producing state without a severance tax, but that doesn’t make it good public policy. Road repairs and an increased need for public services due to oil and natural gas production may merit some narrowly targeted form of taxation to help local governments finance community costs associated with natural resource extraction.
Pennsylvania already has an impact fee on natural gas. Over the past three years, the natural gas industry has paid more than $625 million in impact fees to counties and municipalities across the state. Under Wolf’s proposal, $225 million of the new severance tax revenue would be sent to a separate fund to replace impact fees, which are paid to state and local governments based on the number of wells.
A recent study modeling a potential Pennsylvania severance tax concluded each $100 million in additional production costs imposed on gas extraction by a severance tax would reduce business sales by $22 million, cut personal income by $20 million, cause a decline in total employment of 292, and lower the state’s population by 143 people. The Commonwealth Foundation argues energy companies are already reconsidering investing in the state, citing Huntley & Huntley Energy Exploration as an example.
Many proponents of the severance tax claim energy companies are not paying their fair share, but that is not true. The Pennsylvania Independent Oil and Gas Association estimates that since the start of significant Marcellus Shale drilling in 2008, the natural gas industry has paid approximately $2.1 billion in taxes to state and local governments. That includes Pennsylvania’s corporate income tax, royalty payments to state and local governments for drilling on public lands, and income taxes landowners pay on their royalties.
Energy companies pay the same taxes other businesses pay, including Pennsylvania’s corporate income tax, which is currently the nation’s second-highest at 9.99 percent. Although Wolf’s budget does propose decreasing the state’s corporate tax to 4.99 percent by 2018, the reductions are not guaranteed.
The natural gas industry has been one of Pennsylvania’s areas of greatest growth. Legislators should recognize avoiding severance taxes creates a competitive advantage and should resist the temptation to impose them. Wolf’s proposal represents a 16 percent increase in the size of the state budget. Instead of increasing taxes on a thriving industry, Pennsylvania should focus on keeping taxes low and holding government spending in check.
The following documents provide additional information about severance taxes.
Benchmarks for Assessing the Potential Impact of a Natural Gas Severance Tax on the Pennsylvania Economy
Rose M. Baker and David Passmore of Pennsylvania State University estimate the impact on the Pennsylvania economy of a Pennsylvania natural gas severance tax. They conclude a severance tax on natural gas extraction in Pennsylvania would increase costs for gas drilling companies.
Ten Principles of Energy Policy
Heartland Institute President Joseph Bast outlines the 10 most important principles for policymakers confronting energy issues, providing guidance to help deal with ongoing changes in markets, technology, and policies adopted in other states, supported by a thorough bibliography.
Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
The Political Attraction of Severance Taxes
In response to increasing interest in severance taxes in Pennsylvania and Ohio, Heartland Institute Research Fellow Isaac Orr explains what severance taxes are and why governments implement them. “More often, the taxes are an estimate of how much money government officials can take from one group, typically job-creators that harvest natural resources, without completely removing their incentives to do business in the state,” Orr wrote.
Natural Gas Production Fees Filling Pennsylvania Government Coffers
Writing in Heartlander, Bonner R. Cohen of the National Center for Public Policy Research examines the impact fees paid by Pennsylvania energy companies. “Pennsylvanians are basking in the economic wealth created by natural gas production, with energy companies expected to pay $225 million in natural gas production fees to the Keystone State this year,” Cohen wrote.
Talk of Severance Tax Reduces Drilling
Gordon Tomb of the Commonwealth Foundation discusses the potential effects of a severance tax on new energy investment in Pennsylvania. Tomb notes many companies are already reconsidering their future investments. “The current business climate for the industry underscores that energy companies have risks as well as rewards to consider. Just as other businesses, they should not be treated as money trees to be picked by politicians with budget gaps to fill.”
Pennsylvania Governor Proposes Major Tax Overhaul
Jared Walczak of the Tax Foundation examines Pennsylvania Gov. Tom Wolf’s (D) severance tax plan and argues the benefits created by the reductions in property taxes and corporate taxes are more than offset by increases in the individual income tax, the sales tax, and the severance tax on the state’s booming natural gas industry.
Oil and Gas Severance Taxes: States Work to Alleviate Fiscal Pressures Amid the Natural Gas Boom
The National Conference of State Legislatures lists the severance tax laws of states around the country.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Economy News at https://heartland.org/topics/economy/index.html, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Logan Pike, Heartland’s government relations manager, at [email protected] or 312/377-4000.