Revisiting a Natural Gas Severance Tax

The state budget passed in October did not include a severance tax on natural gas. The tax would’ve impeded the development of the fledgling industry; discouraging new investments while hurting already existing natural gas facilities. According to the Pennsylvania Economy League, more than 26,000 jobs in PA come from shallow oil and gas producers that are already only marginally profitable.

Now, just a few months later, two gubernatorial candidates are advocating for the severance tax. Joe Hoeffel has suggested a 5% extraction and severance tax on natural gas to raise $100 million per year in revenue. Tom Knox is also advocating an extraction fee on natural gas to generate $100 million annually.

Hoeffel stated the severance tax wouldn’t hurt the industry because the “top fifteen natural gas production states” have severance taxes. This thinking is inherently flawed, as it fails to consider states’ existing tax structure and business climates. Pennsylvania’s in particular is not pretty; we have the 2nd highest corporate income tax in the nation. Both Forbes and CNBC ranked Pennsylvania 33rd for best states for business.

States like Florida, Oklahoma, Louisiana, and Texas are either offering a tax credit to small oil and gas producers or have put a moratorium on the severance tax because of the impact on the tax on industry. Pennsylvania’s regulatory burden also makes it more difficult for gas companies to set up shop in Pennsylvania, relative to other states.

Finally, it is a phony claim that the tax is needed to protect the environment. PennEnvironment has other suggestions for natural gas, such as improving the public’s right to know and ability to access information about drilling, coupled with strengthening existing clean water laws to deal with the rapid expansion of drilling.

Too often lawmakers focus on the revenue potential of a tax, blindly acting as though there are no consequences. The severance tax was propose primarily to help fill the $3.2 billion budget shortfall. We must not keep taxing new industries in order to finance the state’s spending.