Governor Wolf’s Natural Gas Tax Proposal

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Governor Wolf continues to press for a natural gas severance tax despite ongoing layoffs and potential bankruptcies in the natural gas industry.

Severance Tax Proposals

  • Gov. Wolf proposed a 6.5% severance tax (starting July 2016) on the value of natural gas, minus a credit for the impact fee, generating an estimated $218 million in revenue.
  • The Independent Fiscal Office (IFO) estimates the current impact fee represents an effective severance tax rate of 5.5% (based on current gas prices and drilling production).
  • While Pennsylvania is the only major natural gas producing state without a “severance tax,” it’s also the only state with an “impact fee.” In addition, Pennsylvania drillers pay taxes that do not exist in top natural gas producing states.

  • There is no corporate or personal income tax in Texas or Wyoming. The corporate tax in West Virginia is 6.5%, while Pennsylvania’s is 9.99%.
  • Of the top ten natural gas producing states, two have no individual income tax, two have no corporate income tax, and only four collect death taxes. Pennsylvania levies all three.
  • If lawmakers want Pennsylvania’s tax burden to reflect other energy-producing states, they should cut or eliminate other state taxes.

Fair Share or More Revenue

  • With an effective tax rate of 5.5%, natural gas producers are paying more than Wolf’s original 5% severance tax proposal.
  • In addition to higher taxes, the administration is revising drilling regulations with an estimated cost of $41 million to $73 million in the first three years. The Marcellus Shale Coalition estimates these rules will cost significantly more, at $2 billion a year.
  • At the same time, the Department of Environmental Protection is developing new methane emission regulations that will impose additional costs.
Top Natural Gas Producing States 2014 States Severance Tax on Natural Gas Exemptions and Incentives for Unconvential Wells Top Corporate Net Income Tax Rate State and Local Tax Burden (as a percentage of state income/ national rank)
1 Texas 7.5% on market value Rate reduction appr. 2% for up to 10 years none 7.6% / 46
2 Pennsylvania 5.5%*   9.99% 10.2% / 15
3 Oklahoma 7% plus 0.095% excise tax Exempt from severance tax for 4 years or until gas production pays for cost of the well 6% 8.6% / 40
4 Louisiana $0.03-0.13 per MCF Severance tax suspension on horizontally drilled well for 2 years or until payback 8% 7.6% / 45
5 Wyoming 6% of taxable value Gas transportation costs subtracted from the taxable value none 7.1% / 48
6 Colorado 2% – 5% based on gross income Allows producers to deduct 87.5% of their property taxes paid to gov. from severance tax to state 4.63% 8.9% / 35
7 New Mexico 3.75%   7.3% 8.7% / 37
8 Arkansas 5% 1.5% on new discovery wells for 24 months and on high cost wells for 36 months (can get extension) 6.5% 9.8% / 17
9 West Virginia 5% + $0.047 per MCF   6.5% 9.8% / 18
10 Ohio $0.025 per MCF   none 9.8% / 19

*Pennsylvania levies an impact fee (akin to a tax) based chiefly on the number of natural gas horizontal wells.
Sources: Energy Information Administration, Independent Fiscal Office, Tax Foundation

Natural Gas Industry Recession

The industry is in the midst of a recession.

  • There are fewer drilling rigs operating in Pennsylvania today than in 2008, the year before the shale boom.  According to Baker Hughes, the number of drilling rigs has declined by over 60 percent in the past year.
  • The latest IFO report on natural gas production finds production is growing at a much slower pace. In addition, the second half of 2015 experienced a 20% increase in “shut in wells” (completed wells that are not producing). In other words, poor economic conditions are convincing companies to leave gas in the ground.
  • Increasing the cost to do business will exacerbate ongoing layoffs and further reduce investments in local businesses.
  • States around the country that rely on oil and gas severance taxes are facing tough decisions.

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