Wrong Time for a Severance Tax

The Pennsylvania Budget and Policy Center (PBPC) released a report this week advocating for a severance tax on natural resource extraction, such as the proposed tax by Governor Rendell on natural gas. The report goes on (for 40 pages) listing all the states with severance taxes, attempting to disprove the popular fears that a severance tax will send extraction companies to other states.

However, the report fails to draw a distinction between easily accessible natural gas and high-cost or horizontally-drilled wells, the type required to drill in Pennsylvania’s Marcellus Shale. Most natural gas states include exemptions or significantly reduced rates for companies drilling in similar regions. Oklahoma provides an exemption until payback, the length of time required to recover the cost of the investment. Texas’s Barnett Shale (the region to which the Marcellus Shale is most often compared), was exempt from the severance tax for drilling that began during the first seven years.

The PBPC report went further, stating, “Fairness would dictate that the Commonwealth should consider a uniform policy applying a severance tax on coal, oil, other mining, and even timber at a rate competitive with surrounding states.” Patrick Henderson, executive director of the Pennsylvania senate’s Environmental Resources & Energy Committee, stated with regard to a severance tax on coal, “I think long ago lawmakers decided they wanted to encourage this industry, not tax it to death.”

One drilling company has already left Pennsylvania. Passing a severance tax now will ensure other companies will follow.