A natural gas 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.
In addition to paying Pennsylvania’s high taxes, the natural gas industry has provided a number of benefits including zbout $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.
The gas industry is already pulling back in Pennsylvania because of low gas prices and better opportunities elsewhere.
Rather than ask Pennsylvanians to pay more in taxes, we need to control government spending.
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.
What do Christmas festivities, a new office building, and a Ford Explorer have in common? They were all paid for with impact fees on natural gas, raising doubts about the necessity of imposing higher taxes on the industry.
A recent audit of local government spending revealed some officials aren't prioritizing the costs related to natural gas drilling or, worse, the expenses associated with drilling were exaggerated from the beginning.
Back in 2012, when the impact fee was being implemented, we questioned the need for more revenue to offset the local costs of natural gas drilling:
Much of the revenue generated through Act 13 isn't used to address drilling impact—Marcellus Shale isn't responsible for deteriorating bridges and parks in midstate counties where drilling doesn't even occur. Act 13 sustains unrelated programs such as Growing Greener and is littered with corporate welfare like subsidizing rail freight assistance and natural gas vehicles.
The Auditor General's report is proof that such questions were well warranted. It's now clearer than ever that the impact fee is addressing far more than drilling impacts. It is clearly a tax.
Instead of debating the wisdom of the current impact fee (tax), Governor Wolf and others continue to push for an additional natural gas tax. Yet, the IFO estimates the current impact fee is equivalent to a 6.9% severance tax—higher than severance taxes in Louisiana, Wyoming, and West Virginia.
With natural gas prices still climbing from record lows and the industry shedding a third of its jobs in 2016, this audit should put a final nail in the severance tax coffin. Any further effort to raise energy taxes would be a transparent attempt to balance the budget on the backs of working people.
As we've seen, raising niche taxes to fill budget holes is a losing strategy. Only six months ago lawmakers passed new taxes on digital downloads, vape shops, and cigarettes. The result? A estimated $524 million budget shortfall.
Let's avoid repeating our mistake and acknowledge the truth: imposing an additional tax on one industry will do nothing to help solve the state's budget problems.
The government giveth, and the government taketh away. Nowhere is this more apparent than in Pennsylvania’s relationship with the natural gas industry.
On the one hand, Gov. Wolf offers a Pipeline Investment Program that would provide $24 million in matching grants to businesses, schools and hospitals for connections to gas pipelines.
On the other, the Pennsylvania Department of Environmental Protection (DEP) proposes new rules on already highly regulated production activities. The gas industry filed a legal challenge to some of the rules. They claim the regulations will cost $2 billion a year “without providing meaningful environmental benefits.” Excluding initial start-up costs, DEP estimates the maximum annual cost of the regulations to be $31 million, or about $24,000 a well.
Meanwhile, Braskem America, a plastics manufacturer, chooses Texas over Marcus Hook, Pa., for the location of a $500 million plant because of Pennsylvania’s lack of pipeline capacity to deliver feedstock.
At the same time, pipeline projects are missing in-service targets due to regulatory delays.
Delayed by about 18 months is the start-up of Sunoco Logistics’ $2.5 billion Mariner East 2 project, which will transport natural gas liquids from western Pennsylvania to Marcus Hook. The company is responding to requests from the DEP for additional information on permit applications.
In New York, the Constitution Pipeline, has languished since April when New York regulators denied the project a water-quality permit. The denial came four months after New York Gov. Cuomo had approved $2 billion in economic-development grants that included an extension from the pipeline to a manufacturing plant.
Pennsylvania should learn from these missed opportunities and stop efforts to finance pipeline extensions to private businesses with tax dollars. After all, Governor Wolf just lamented policies that put well-connected businesses before taxpayers:
" . . . too often, special interests and the well-connected are put before Pennsylvania families and the middle class."
So why not return to citizens the $24 million being transferred from an “underutilized” fund for alternative energy projects? Instead of doling out politically-selected grants, the Governor should focus on ways to balance safety with enhancing the competitiveness of one of the state’s most promising enterprises.
In general, state government is too focused on doling out taxpayer cash and promulgating regulation than on fostering an environment for good-paying jobs and economic growth.
Why would one of Pennsylvania’s largest natural gas producers suddenly switch from selling all non-Pennsylvania assets to purchasing a $3.3 billion Houston company that operates exclusively in Louisiana?
Range Resources, which in 2004 drilled the first commercial horizontal well in Pennsylvania’s Marcellus Shale, plans to purchase Memorial Resource Development partly because of regulatory hurdles in Pennsylvania and other Northeastern states.
Energy companies are trying to cope with constant calls for higher taxes, new methane emissions standards, a dramatic overhaul of drilling regulations, and pipeline delays. At the same time, the region is experiencing a severe and prolonged drop in natural gas prices.
The Dallas Morning News reports:
“The U.S. gas market is Balkanized," said Subash Chandra, an analyst with Guggenheim Securities. "And the Appalachian Basin is becoming increasingly isolated."
Pipeline projects in Pennsylvania and New England running into regulatory issues over the past year include Northeast Energy Direct, Constitution, Rover and PennEast. In some cases, the delay could be a matter of months; for others, longer.
Keeping the natural gas from getting to market in the Northeast makes retail prices bounce around more and can contribute to shortages in an unusually cold winter. And it pushes some producers to the sidelines for a while.
“A couple of the producers with the best cost of production in North America are sitting on their hands for a couple of years," Miller said.
In Pennsylvania, the industry has shed thousands of jobs, and the number of drilling rigs operating in the state is at 2007 (pre-boom) levels. The paper continues:
But in the meantime, the Range purchase of Memorial means Range will have options. It can push development in Louisiana while waiting for more congenial conditions in Pennsylvania.
Reporting on the transaction, Forbes says, “[P]ipeline bottlenecks in the northeast have gotten so bad that Range has been realizing sale prices 66% below market.”
Before punishing the natural gas industry with a severance tax or regulations of questionable value, Pennsylvania politicians should consider congeniality—or common sense.
Unfortunately, a lack of it seems already to have driven one company to invest $3 billion in Louisiana instead of in Pennsylvania.
What is the natural gas industry's "fair share" of taxes? The answer depends on the calendar year.
An analysis from the Independent Fiscal Office (IFO) finds the current "impact fee" is effectively a 5.5 percent severance tax due to a 16-year-low in natural gas prices. In other words, the natural gas industry is already paying a higher tax rate than what the Governor Wolf proposed in 2014.
As a reminder, Governor Wolf called for a 5 percent severance tax during his campaign to replace the impact fee and "put Pennsylvania in line with other natural gas producing states." Of course, many of those states do not have individual income taxes, corporate income taxes or death taxes.
Natural gas prices continued to fall in 2015, so Governor Wolf redefined "fair share" by adding a price floor. Under this policy, natural gas companies pay taxes on gas at $2.97 per Mcf (thousand cubic feet), even though the actual price of natural gas was below that number . . . and still is.
According to testimony by the IFO, Wolf's original plan would establish an effective 17.3 percent severance tax rate in 2016, by far the highest rate in the nation.
Now the Governor is redefining fair share once again by proposing a severance tax of 6.5 percent to collect an estimated $218 million in revenue. For context, that's about four times higher than Ohio's natural gas severance tax and higher than neighboring West Virginia's 5 percent severance tax.
On top of a severance tax proposal, the administration is formulating new natural gas drilling regulations and adding methane emission requirements. The cost of these rules is not yet known.
If the governor and lawmakers want Pennsylvania’s tax rates to reflect other energy producing states, they should cut the impact fee or eliminate other state taxes.
They are similar in size, resources and population, but the past few years have brought prosperity to Susquehanna County, Pennsylvania and stagnation to Delaware County, New York.
The big difference? Fracking is allowed in one county and banned in the other.
Residents in Susquehanna County, where fracking for natural gas is allowed, are enjoying a robust economy while Delaware County—just across state lines—is suffering, according to the online newsletter Natural Gas NOW. On the Pennsylvania side, local companies like Diaz Manufacturing and Andre & Son are expanding. Meanwhile, New York's ban on natural gas drilling, "has condemned Upstate New Yorkers to the ‘pastoral poverty’ so typical of the region north of Orange County and west of the Hudson."
Referencing sources such as the Federal Deposit Insurance Corporation and U.S Bureau of Economic Analysis, the newsletter paints a sharp contrast between otherwise similar communities.
- Bank deposits:
- Susquehanna saw a 38% increase between 2008-2015
- Delaware increased by 19% in the same time period
- Income from dividends, interest and rents:
- Susquehanna saw a 44% increase between 2008-2014
- Delaware increased by 22% in the same time period. (The newsletter notes that this figure is heavily influenced by royalty payments from gas wells.)
- Wages and salaries:
- Susquehanna saw a 47% increase between 2008-2014
- Delaware increased by 4% in the same time period
- Average wages and salaries:
- Susquehanna saw a 41% increase between 2008-2014
- Delaware increased by 14% in the same time period
The evidence should give pause to policymakers who take Pennsylvania’s gas resources for granted or who seek to exploit them with burdensome taxes and regulations.
A recent NPR article notes that Pennsylvania “gathers less than 1 percent of its total tax receipts from an impact fee” on natural gas production (emphasis mine). Naturally, the Wolf Administration uses this to support its call for higher taxes.
But the article fails to mention the other side of that formula: Pennsylvania gets most of its tax revenue from other tax sources.
Indeed, of the states on NPR's chart:
- Alaska, Wyoming and Texas have no individual income tax. Gov. Wolf wants to raise Pennsylvania’s.
- Alaska has no sales tax. Gov. Wolf wants to raise and expand Pennsylvania’s.
- Texas and Wyoming have no corporate income tax. Pennsylvania has the second-highest tax rate in the industrialized world.
- Texas, Alaska, Wyoming and North Dakota all have no death tax. Only New York collects more in death tax revenue than Pennsylvania.
Instead of following the lead of other states by lowering our overall tax burden and cutting sales, income, corporate, and inheritance taxes, Gov. Wolf is proposing the largest tax increase in America.
In contrast to NPR's one-sided analysis, our policy memo on the proposed energy tax offers an apples-to-apples comparison of state taxes. Our analysis also notes that Gov. Wolf's proposal would impose the highest effective severance tax rate (17 percent) in the country. The current impact fee represents an effective tax rate of 4.7 percent, according to the Independent Fiscal Office.
The Pennsylvania state budget remains long overdue, mostly due to Gov. Wolf’s misconstrued idea of compromise. He continues to insist on a severance tax to increase education spending, but a breakdown of his proposal shows most of the money for education comes from other tax increases.
CF’s Matt Brouillette joined Paul Guggenheimer on WESA’s Essential Pittsburgh radio show to discuss Gov. Wolf’s proposed severance tax.
Matt reminds listeners that Pennsylvania already has a severance tax–called an Impact Fee. “While we don’t call it a severance tax, we have an effective severance tax that the Independent Fiscal Office has said it is about 4.7%”.
A severance tax, as Matt points out, would bring economic harm not just to the natural gas industry, but to all Pennsylvanians. This includes $180 million more in higher utility taxes for poor and middle class families and 4,138 fewer private sector jobs in 2017.
Click here or listen below to hear more.
The Essential Pittsburgh radio show airs weekdays from noon to 1 p.m.
Follow Commonwealth Foundation’s SoundCloud stream for more of our audio content.
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.
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