Natural Gas Severance Tax: Still A Bad Idea

In the coming months, debate on a proposed natural gas severance tax will heat up as legislators attempt to pass a balanced budget before June 30. Last year, lawmakers and Governor Rendell decided that taxing the emerging industry would cripple it. Facing another budget shortfall, Governor Rendell has now decided drilling companies can afford to pay and additional tax- but the harmful effects remain unchanged.

The proposed severance tax would take 5% of the value plus 4.7 cents per thousand cubic feet of extracted natural gas. In addition, the Governor would continue leasing state lands to drilling companies in order to pull in an extra $180 million in revenue.

Rendell’s argument that all other gas producing states have a severance tax only tells part of the story. Most of these states exempt horizontally-drilled wells (which are typical in the Marcellus Shale region). Oklahoma exempts these wells until the company recovers its investment. In Texas, these high-cost wells receive an 80% tax deduction. And Florida provides tax credits to small oil and gas producers. Moreover, these states’ overall tax burdens are lower than Pennsylvania’s 11th highest in the nation.

Rendell’s “fair share” argument is further undermined by the fact that drilling companies already pay either the highest Corporate Net Income Tax in the world or the Personal Income Tax, plus the Capital Stock and Franchise Tax, leasing fees, and royalties, and they finance bonds to maintain local infrastructure.

Despite these costs, some gas companies are eager to invest in the Commonwealth. However, Gov. Rendell remains determined to tax energy sources that are creating permanent jobs to subsidize alternative energies unable to survive on their own merits.

Some lawmakers are proposing a five-year moratorium on drilling in state lands until the environmental effects are better understood. Yet the fracking process used in horizontal drilling has been utilized for decades with an excellent track record. 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. And when drilling sites are cited for infractions those problems are typically minor and easily corrected. Lawmakers who worry about the environmental impact should be mollified by the lack of evidence of water contamination due to Marcellus Shale drilling.

Others believe that a natural gas tax is necessary to pay for increased regulatory costs. Creating a new revenue source is unnecessary to deal with potential contamination. If pollution occurs, fines and penalties levied by the Department of Environmental Protection(DEP) should cover the clean-up costs. Better yet, local problems should be addressed by local government in cooperation with the DEP. One example is the wear and tear on roads from increased truck traffic. Drilling companies are already accountable for any damaged roads or infrastructure, and in many cases roads have actually improved since drilling began. For example, Range Resources has spent more than $4 million in the last two years rebuilding roads and new bridges in three local communities in Western Pennsylvania.

If a severance tax is enacted, property owners’ royalties will be taxed, and companies may choose to focus investment in other shale deposits around the United States. Recently, Devon Energy CEO Larry Nichols cited the “political problems” in Pennsylvania that dissuaded his company from investing in the region. State government is driving away these businesses while spending billions to attract other politically favored businesses. None of the above proposals effectively addresses the root problems of government overspending, which is why 90% of the proposed severance tax is going to the state General Fund, not for local environments or infrastructure.

Arguments in favor of the severance tax ignore a host of benefits the drilling companies are already providing, including: lease payments to the state treasury, royalties and signing bonuses to citizens, tax revenue through traditional sources, road repairs, and most importantly, thousands of jobs. Lester Lave, a Carnegie Mellon University professor and co-director of the university’s Electricity Industry Center, recently said, “You could have a blue-collar boom here. Cheap gas really could stimulate industry, everything from glass making, to fertilizer, to power plants- a lot of industries run on cheap fuel.”

The Marcellus Shale boom is accomplishing something that all of Governor Rendell’s economic development programs cannot- permanent jobs and more state tax revenue without a dime of taxpayer subsidies. Resisting the calls to tax natural gas producers will ensure Pennsylvania maintains a competitive edge without compromising our fiscal health or natural resources.

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Elizabeth Bryan is a research associate at the Commonwealth Foundation (, an independent, nonprofit public policy research and educational institute based in Harrisburg.