Budget Facts 2010: Natural Gas Severance Tax

Natural gas booming Marcellus Shale Formation

• The Marcellus Shale is a thick and difficult-to-drill geological formation containing natural gas nearly a mile or more under much of Pennsylvania.
  • More than two-thirds of Pennsylvania contains accessible natural gas.
  • Recent estimates place recoverable gas in the entire formation (not just Pennsylvania) at 489 trillion cubic feet.
  • As of 2008, shale drilling created an estimated 29,000 jobs, and another 98,000 jobs are projected to be created in 2010.

Rendell’s Proposed Tax

• Gov. Rendell has proposed a tax of 5% on the value of extracted natural gas, plus $.047 per thousand cubic feet of extracted gas. There is an exemption for marginal wells producing less than 60,000 cubic feet per day.
  • Rendell expects to collect $178 million in the upcoming fiscal year from the proposed severance tax and $500 million per year by 2014-15.
  • Ninety percent of severance tax revenue would go to the state General Fund-not for local environmental or infrastructure improvements as claimed by most tax proponents.

• The governor modeled his proposal after West Virginia’s severance tax.
  • In the last 10 years, drilling activity in the Commonwealth has increase by 400%, however, West Virginia has only seen a 20% increase.

Facts and Myths About the Severance Tax

• Tax supporters highlight the fact that other states already have a natural gas tax, however, this is only part of the story; most state’s with difficult-to-drill shale formations have reduced their severance tax to encourage drilling. For example:
  • Texas and Arkansas reduced their severance tax for high-cost gas wells by nearly 80%.
  • Oklahoma applies a severance tax of 7% on natural gas extraction, but exempts all horizontally-drilled wells until payback (when the company recovers its multi-million dollar per-well head investment).
  • Louisiana suspends its severance tax for horizontally-drilled wells until after they have been in production for two years or reached payback.
  • A similar moratorium on any sort of severance tax will allow the natural gas industry to emerge and bring jobs, revenue, and economic development to Pennsylvania.

• It is a false claim that drillers will come to Pennsylvania regardless of a tax.
  • Pennsylvania’s natural gas reserves, while large and close to destination markets, only remain attractive investments if costs are carefully controlled and expenses minimized.
  • The proposed tax is estimated to reduce in-state drilling activity by at least 30% which would cost Pennsylvania $880 million in lost state and local taxes by 2020.
  • Devon Energy, one of Fortune Magazine’s 100 Most Admirable Companies, stated on a CNBC interview that the company would not consider drilling in Pennsylvania because of the “political problems”.

• Drilling companies are already paying their “fair share” to the state without a new tax.
  • Most drilling companies pay Pennsylvania’s Corporate Net Income Tax, Capital Stock and Franchise Tax, leasing fees, and royalty payments.
  • The state has allowed drilling on over 400,000 acres of state forests, receiving nearly $300 million in leasing fees. In addition, the state has received over $250,000 in royalty payments for the nine wells currently in production.
  • Reasonable and competitive tax rates will provide long-term growth and benefits to Pennsylvania’s economy.

• Marcellus Shale exploration doesn’t ravage the environment or local infrastructure.
  • Drilling companies are required to put up bonds for all posted roads and bridges, and repair any damage they cause.
  • Environmental regulations are tightly monitored by six different state agencies. Drillers are responsible for any groundwater contamination within 1,000 feet of each well.
  • A Penn State University study found that more than 95% of complaints received from homeowners suspecting contamination from gas drilling were actually due to preexisting problems or other activities, such as agriculture.
  • Pennsylvania laws ensure drilling companies, and not taxpayers, are held responsible for their environmental and infrastructural damages.

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For more information on the Pennsylvania Budget, visit CommonwealthFoundation.org/Budget