Natural Gas Severance Tax

Policy Points

Pennsylvania’s economy is not competitive.

A severance tax must be considered in light of the state’s total tax structure. Pennsylvania taxes the natural gas industry in many ways that don’t exist in other drilling states. For example, there is no corporate income tax or personal income tax in Texas or Wyoming, and the corporate income tax in West Virginia is 6.5%, compared to Pennsylvania’s 9.99% rate.

Top Natural Gas Producing States 2013

States

Severance Tax on Natural Gas

Exemptions and Incentives for Unconventional Wells

Top Corporate Net Income Tax Rate

State and Local Tax Burden (as a percentage of State income/national rank)

1

Texas

7.5% of market value

Rate reduction appr. 2% for up to 10 years

none

7.5% / 47

2

Pennsylvania

2.1%*

 

9.99%

10.3% / 10

3

Louisiana

$0.03-0.13 per MCF

Severance tax suspension on horizontally drilled well for 2 years or until payback

8%

7.6% / 46

4

Oklahoma

7% plus 0.095% excise tax

Exempt from severance tax for 4 years or until gas production pays for the cost of the well

6%

8.5% / 39

5

Wyoming

6% of taxable value

Gas transportation costs subtracted from the taxable value

none

6.9% / 50

6

Colorado

2% - 5% based on gross income

Allows producers to deduct 87.5% of their property taxes paid to gov. from severance tax to state

4.63%

9% / 32

7

New Mexico

3.75%

 

7.3%

8.6% / 37

8

Arkansas

5%

1.5% on new discovery wells for 24 months and on high cost wells for 36 months (can get extension)

6.5%

10.3% / 12

9

West Virginia

5% + $0.047 per MCF

 

6.5%

9.7% / 19

10

Utah

3% - 5%

6 months exemption for development wells

5%

9.4% / 28

11

Alaska

25% - 50% net value

Reduction for all drilling in Cook Inlet basin and when gas is used in state; Limited tax credits for exploration

9.4%

7% / 49

12

Kansas

8% on gross value severed from earth

3.67% tax credit for ad valorem taxes paid, effectively reducing the severance tax to 4.33%

7%

9.4% / 26

13

California

<0.01 per MCF

 

8.84%

11.4% / 4

*Pennsylvania levies an impact fee (akin to a tax) based chiefly on the number of natural gas horizontal wells.
Sources: Energy Information Administration, Independent Fiscal Office, Tax Foundation

Drillers pay their fair share.

In addition to paying Pennsylvania’s high taxes, the natural gas industry has provided a number of benefits:

  • About $7.7 billion in royalties to landowners from 2007-2012, according to the Department of Revenue. State income taxes collections on royalties resulted in $235 million;
  • $318 million in other state taxes since 2009, according to the Department of Revenue. Supporting businesses paid another $1.4 billion in state taxes;
  • More than $600 million from the state impact fee from 2011-13;
  • $45.5 million in energy savings for PA schools in 2012-13;
  • $582 million from the lease of state forest land through 2012;
  • Permit fees, bonds for wells, and fines levied by DEP;
  • 166,642 additional jobs since 2010.

Education funding & School District spending are at an all-time high.

  • The proposed Education Reinvestment Act places a 5% severance tax plus 4.7 cents per thousand feet of volume on natural gas extraction. The tax is expected to generate over a billion dollars in fiscal year 2017, primarly for increasing k-12 education spending.
  • However, our education woes stem from our broken funding system, not a lack of education dollars.

Jobs are at risk.

Rather than ask Pennsylvanians to pay more in taxes, we need to control government spending.

  • Instead of taking more, government should limit spending growth to inflation and population growth.
  • Such a limit would have erased any deficit and avoided the need for more and higher taxes.

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To find more information on Natural Gas, visit CommonwealthFoundation.org.

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