Economics is Funky

In discussing a natural gas severance tax, Patriot News reporter-columnist Laura Vescey makes fun of the fundamental economic principle that companies respond to higher taxes:

The Commonwealth Foundation, for instance, pushes the funky argument that annoying drillers with any tax will somehow drive them to other states.

It is true that drillers will not likely pull up the wells they have already drilled, but there can be little argument that a tax will affect future decisions of drilling. Taking more money on top of what drilling companies already pay in taxes will simply result in costs being passed down – most likely through less investment in Pennsylvania, fewer jobs, and lower wages and benefits for workers.

The question of will it be a “not that large” depends on your perspective of size. A Penn State study of the impact of a proposed tax estimates that Gov. Rendell’s proposed natural gas tax would result in 30% less drilling investment in Pennsylvania. The industry would still build in Pennsylvania, but there would be fewer jobs created.

Further, advocates of a tax fail to offer accurate information about severance taxes in other states. They cite natural gas taxes in states like Wyoming – which has no state corporate income tax, vs. Pennsylvania’s highest-in-the-world rate – and Utah, which has both lower business taxes and a 6 month exemption for new wells. Not only do states with severance taxes use those to lower other business taxes, they usually delay implementation, offer tax exemptions or credits, or reduce the tax in hard-to-drill areas to encourage drilling. Texas and Arkansas reduced their severance tax for high-cost gas wells by nearly 80%. See our latest policy brief (particularly tables on pages 8 and 9) for the facts about natural gas excise taxes.

In order to accept Vescey’s premise that a tax would have no impact, you would have to believe in an economic theory that we should impose a tax because “greedy corporations” deserve it, yet those same greedy corporations will simply eat the cost of the tax out of their profits, and not pass along these higher costs.