Gov. Wolf continues to promote a severance tax on natural gas, even as Pennsylvania energy companies report financial losses and job reductions.
This week, Consol Energy projected a second quarter loss—largely because of low energy prices—and said it would record a significant write-down on certain oil and gas assets. Consol stock is down 43 percent over the past three months. It is cutting 470 workers across its coal, gas and corporate operations.
As is often said, those who cannot remember history are doomed to repeat it. Wolf's tax push brings to mind the federal windfall profits tax on oil companies 35 years ago.
Ignoring huge tax receipts routinely generated by the oil industry, politicians reacted to rising gasoline prices with the enactment of the Crude Oil Windfall Profit Tax Act of 1980 to punish "greedy" energy producers.
The tax depressed the domestic oil industry, increased foreign imports and raised only a tiny fraction of the revenue forecasted, according to a 1990 Congressional Research Service study.
The view that energy companies are geese with an infinite supply of golden eggs flies in the face of economic reality, and is refuted by news reports almost daily.
With such a backdrop, a Wolf energy tax won’t bring the fabled golden eggs, but could fatally cook the goose of Pennsylvania's economy.
Gov. Tom Wolf and special interest groups continue to insist Pennsylvania needs to enact a severance tax because "other states have one." This, of course, ignores the fact that Pennsylvania has an "impact fee"—which functions like a tax and has generated more than $800 million since 2011. It also ignores that Pennsylvania drillers pay all the taxes common to every other business, more than $300 million since 2009.
As we've pointed out, lawmakers need to consider the overall tax burden when comparing Pennsylvania to other states.
So, how does Pennsylvania stack up to states with severance taxes?
According to Census data, 11 states collected more than $200 million in total severance taxes in 2014. Pennsylvania would be the 12th state, if our "impact fee"—which generates more than $200 million every year—were counted.
Of those 11 states:
- 3 have no individual income tax
- 2 have no corporate income tax
- 5 have no death tax
- 2 have no general sales tax
The visualization seen below—or click here to view in your browser—shows that if lawmakers want Pennsylvania to "be like other states," especially energy producing states, we should cut or eliminate other state taxes.
Nearly two weeks into the new fiscal year, and Pennsylvania is still without a budget after Gov. Wolf vetoed the Republicans' proposal last month.
The governor, whose own budget proposal didn't receive a single vote in the House, cited the lack of severance tax as one of the reasons for his veto. Keep in mind, this is a tax that would destroy jobs and raise energy costs for poorer families.
Elizabeth Stelle, CF’s director of policy analysis, was on WSBA’s The Gary Sutton Show to discuss the pitfalls of raising taxes on the natural gas industry.
Gov. Wolf’s camp claims the gas industry doesn’t pay its fair share of taxes. Not true. As Elizabeth points out, Pennsylvania already imposes an Impact Fee and “many other taxes, fees, and regulations that put a very heavy burden on the drilling industry."
The severance tax would drive away investment in the state and result in 4,138 fewer private sector jobs in 2017. It would also hit poor and working class families with $180 million more in higher utility taxes.
To listen to Elizabeth's conversation with Gary Sutton, check out the link below.
The Gary Sutton Show airs daily on WSBA 910AM in the York area.
Follow Commonwealth Foundation’s SoundCloud stream for more of our audio content.
America Works USA, an affiliate of the union-funded Democratic Governors Association, recently launched an ad campaign in support of Gov. Wolf’s effort to raise taxes on middle- and low-income people.
The group, bolstered by a war chest of at least $500,000, took to the airwaves with radio and TV ads slamming the Republican budget and touting Gov. Wolf’s budget as a practical alternative. Regrettably, the ads are chock-full of misinformation. Although the ads aren’t very long, we identified seven erroneous claims, each of which are corrected below.
Claim #1: The Republicans’ budget lets oil and gas drillers “of the hook.”
Reality: According to America Works, Republicans let the natural gas industry of the hook because they refused to impose higher taxes on the industry. Never mind gas drillers already pay taxes applicable to every other Pennsylvania industry ($318 million in taxes since 2009). They also pay an Impact Fee, which generated more than $800 million in revenue since 2011. According to the Independent Fiscal Office, the 2015 Impact Fee is equivalent to a 4.7 percent effective tax rate, placing drillers firmly on the hook.
Claim #2: The Republican budget proposal fails to fund education.
Reality: Putting aside the notion that more education spending produces better academic achievement (there’s no correlation), the Republican budget includes $370 million dollars in additional spending on K-12 education. The budget vetoed by Gov. Wolf would have increased support of public schools to more than $10.4 billion—a new record high—for the 2015-2016 budget year.
Claim #3: The budget deepens the deficit.
Reality: Baked into the “deficit” number is projected increases in government spending. A real deficit is when government spending exceeds tax revenue. There’s no reason why lawmakers can’t slow the growth of spending and reform the cost drivers in the budget to ensure it’s balanced for next year. But if lawmakers must choose between prioritizing all spending and even use one-time revenues or raising taxes, the first option is preferable.
Claim #4: Gov. Wolf is fighting for a middle-class budget that lowers property taxes.
Reality: The governor’s budget raises taxes on Pennsylvanians of all income levels, according to the Independent Fiscal Office. The governor’s promise of property tax relief only provides 30 cents of relief for every dollar in new taxes—with a net increase of $1,400 per family of four—while simply shifting the tax burden and failing to address ballooning local pension payments driving up property taxes.
Claim #5: The governor makes oil and gas companies pay up to fund schools.
Reality: None of the proposed severance tax revenue is dedicated for education spending—though much of it is earmarked for other projects, including corporate welfare for alternative energy companies.
And according to the governor’s own estimates, his income tax and sales tax increases will cost taxpayers several times more than his severance tax. His proposal collects more funding from taxing health care services and day care than from taxing natural gas.
Claim #6: Pennsylvania ranks 44th in state support for education.
Reality: Pennsylvania ranks near the national average in state funding per student. Overall, Pennsylvania ranks 10th in total funding per student—at $15,000, which is nearly $3,000 above the national average. Moreover, total school district spending reached an all-time high in 2013-14, at $26.1 billion. State aid to school districts is also at a record high.
Claim #7: Pennsylvania is the only major gas producing state that doesn’t charge oil and gas drillers an extraction tax.
Reality: Pennsylvania has an extraction tax. It’s call an Impact Fee. Additionally, Pennsylvania has one of the highest overall tax burdens of all the oil- and natural gas-producing states. Other states, like Texas and Wyoming, do not have any personal or corporate income tax. Alaska uses its severance tax to give rebates to residents. Any apples-to-apples comparison must consider the total tax burden.
In the Philadelphia Inquirer earlier this week, Gov. Tom Wolf uses strong rhetoric about his desire for a large severance tax increase.
The governor responded by calling it "reprehensible" that the GOP had not agreed to impose a new tax on natural gas drillers, new money the governor wants to use for public schools.
Let’s be clear about a few things:
- Wolf's severance tax isn’t dedicated to education, as Dennis Owens of ABC 27 points out. It is earmarked for corporate welfare for "alternative energy subsidies" among other things, but not for public schools.
Moreover, the vast majority of Wolf's tax increase are via income and sales tax hikes. In other words, his plan would generate more money from taxing health care and day care than natural gas.
- Gas drillers are already taxed. They paid more than $800 million in impact fee taxes from 2011 to 2014 and $318 million in other state taxes since 2009. Drilling companies pay the same taxes as every other business in Pennsylvania.
- Our analysis of Wolf’s proposed severance tax finds it would result in 4,138 fewer private sector jobs in fiscal year 2017.
- Everyone—including poor and working class families—would pay more for a severance tax increase. The Independent Fiscal Office finds that households earning less than $100,000 will pay $180 million more annually in higher utility bills as a result of Gov. Wolf's proposal.
Destroying jobs and making poor families pay higher energy bills—that's what is truly reprehensible.
Throughout this state budget debate, Gov. Wolf has touted his natural gas severance tax to fund education. And some reporters refer to the severance tax as the "cornerstone" or "centerpiece" of his plan.
Except it isn't. The severance tax makes up a slim portion of Gov. Wolf’s proposed tax increases. In fact, his plan to tax health care and day care would raise more revenue than slapping an additional tax on the natural gas industry.
He never talks about his sales tax proposals—probably because they are so unpopular. His entire tax plan couldn't garner one single vote in the House. It failed 0-193. Yet, he hasn't said whether he is still demanding a $4.6 billion tax increase.
Even if Gov. Wolf has dropped the majority of his massive tax hikes, that’s no reason to accept a new severance tax. As Dawn pointed out yesterday, the severance tax is bad for all energy consumers, no matter your income level.
As lawmakers work on passing a state budget, one of Gov. Wolf's top priorities—a severance tax on the natural gas industry—is being hotly debated.
Here are six reasons why a natural gas severance tax is a bad idea:
- Middle class families and businesses will pay for it. Households earning less than $100,000 will pay $180 million more annually in higher utility bills as a result of Gov. Wolf's proposal.
- Jobs would be lost. According to a recent analysis, a proposed severance tax, with no other tax changes, would result in 4,138 fewer private sector jobs in fiscal year 2017.
- We already have a severance tax. It's called an impact fee, but it hampers the economy like a severance tax.
- Gas companies already pay every single tax that businesses in Pennsylvania are required to pay. A severance tax would unfairly punish one type of industry in Pennsylvania to provide funding for legislative interests that have nothing to do with natural gas.
- Any claims of the gas industry needing to pay their "fair share" are bogus. Gas drillers paid more than $800 million in impact fee taxes from 2011 to 2014 and $318 million in other state taxes since 2009. If these amounts don't constitute a “fair share,” what does?
- Punishing the gas industry with higher taxes punishes workers. Private sector labor leaders have bemoaned the reduction in man hours already under way. According to the vice president of the Laborers’ International Union of North America, "If you excessively tax the shale industry, you risk hurting employers, workers and communities across the state."
In the end, a severance tax would hurt the very people Governor Wolf claims he is trying to help.
Proponents of a new natural gas tax—which would be in addition to the existing impact fee (tax) and other taxes extractors already pay—ignore the consequences new taxes will have on working people.
In contrast, the Independent Fiscal Office's analysis of Gov. Wolf's severance tax proposal finds Pennsylvania families and businesses will pay the tax through higher energy prices. Even though 80 percent of the tax will be borne by consumers in other states, Pennsylvania residents will still shoulder a significant burden.
Households earning less than $100,000 will pay $180 million more annually in higher utility bills as a result of Gov. Wolf's proposal.
|Tax Incidence for Pennsylvania Residents, FY 2018-19|
|Net tax increase by household income under Wolf proposed budget, in millions|
|Under $25,000||$25,000-$49,999||$50,000-$74,999||$75,000-$99,999||$100,000-$250,000||More than $250,000||Total, Households less than $100,000|
|Sales and Use||$367||$616||$606||$512||$1,283||$721||$2,101|
|Corporate Net Income||($25)||($45)||($41)||($35)||($87)||($75)||($146)|
|Net Severance tax||$44||$56||$47||$34||$60||$23||$181|
|Source: Independent Fiscal Office: http://www.ifo.state.pa.us/resources/PDF/Revenue_Proposal_Analysis_April2015.pdf|
If enacted, Gov. Wolf's proposed tax would be the highest effective rate in the country.
Further, as I pointed out in recent testimony, the tax would hinder job creation and economic growth. Using the STAMP model developed by the Beacon Hill Institute at Suffolk University, we found the proposed severance tax, with no other tax changes, would result in 4,138 fewer private sector jobs in fiscal year 2017.
Encacting a severance tax won't result in free money from pots of gold found at the end of rainbows—it will be paid for by families through higher energy bills and by residents in the form of fewer job opportunities.
Did you know Pennsylvania imposes a severance tax on natural gas workers? It’s known as an impact fee, but it operates just like a severance tax.
The fee is levied on each well drilled, and the fee amount is determined by a number of factors, including the price of gas and type of well. According to testimony from the Independent Fiscal Office (IFO), the fee is projected to generate $210 million for state and local governments this year. If this projection holds, the impact fee’s effective tax rate will be 4.7 percent. This figure almost matches the 5 percent rate Gov. Wolf called for during his campaign.
But it’s like the impact fee is invisible to many proponents of a severance tax, who point out Pennsylvania’s uniqueness in being the only gas producing state without a tax on natural gas. Even if this were true, shouldn’t policymakers strive to make Pennsylvania more competitive by keeping taxes as low as possible? Imposing an additional tax on an industry because other states have done the same is a poor justification.
Uniqueness, in this respect, isn’t a hindrance; it’s an asset.
Furthermore, of the states currently imposing a severance tax, most enjoy better tax climates than Pennsylvania. A higher severance tax only compounds this problem. If the goal is to make Pennsylvania a better place to live and work for everyone, workers should not be required to bear the brunt of higher taxes. Gov. Wolf’s push for a severance tax is a direct violation of this principle.
His severance tax proposal carries a whopping 17.3 percent effective tax rate with it, which would be the highest in the nation. Imposing this tax is sure to cause pain for employees in the gas industry. Critics dismiss such arguments, but it’s hard to believe taking more than $1 billion out of the natural gas industry and transferring it to state government will not have an adverse effect on the people whose livelihoods depend on Marcellus Shale.
There’s also a moral component here. Why should workers in one industry be singled out for higher taxes? Would a tax only on farmers or doctors be fair and appropriate? Most would say no.
For too long, Pennsylvania's natural gas industry has been thought of as a quick revenue stream instead of the economic engine driving the state to prosperity. If the former mindset prevails, expect the latter to stall.
Gov. Wolf justifies his proposed natural gas severance tax with populist rhetoric, claiming Pennsylvania’s gas drillers aren’t paying their "fair share." This is far from accurate.
CF’s Nate Benefield was on The Gary Sutton Show to take on the "fair share" claim and expand on his recent state Senate testimony in which he unveiled the true, harmful impacts of the proposed severance tax.
Nate explains how the severance tax will hinder industrial investment in Pennsylvania and lead to 4,000 fewer private sector jobs by 2017.
The severance tax would also hurt Pennsylvania’s families, including families earning less than $100,000, who would have to pay an additional $180 million–mostly through higher energy bills.
Click here or listen below to hear more.
The Gary Sutton Show airs daily on WSBA 910AM in the York area.
Follow Commonwealth Foundation’s SoundCloud stream for more of our audio content.
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