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Environment & Energy

Policy Group Adds Name to List of Those Calling for Gas Extraction Tax

As Pennsylvania lawmakers grapple with finalizing the state budget, and face a financial shortfall, lawmakers and outside groups are calling for a severance tax on the natural gas industry to increase revenues.

“We recommend that the general assembly adopt a five percent severance tax,” said Sharon Ward, director of the left-leaning Pennsylvania Budget and Policy Center. “Frankly, we believe that across the shale states, there should be a common severance tax rate for predictability for drillers and to take the severance tax conversation off the table and let the companies drill based on commodity prices.”

Producers currently pay impact fees, but no extraction taxes. A bill introduced in Harrisburg would implement a 4.9 percent severance tax on natural gas. The impact fee has generated more than $400 million over two years; a severance tax is expected to pull in even more revenue. But one argument against such a tax is that it will force companies to leave Pennsylvania.

“Researchers concluded that severance tax impact on return of investment would be so small that it would be highly unlikely to drive drillers to greener pastures,” said Michael Wood, research director with the PBPC. “Even with a severance tax, the natural gas is very profitable to extract in Pennsylvania.”

Other arguments include that with the impact fee and corporate taxes, drillers are paying competitive taxes. Wood said there are numerous tax incentives and strategies used to reduce tax liability.

“Over the years there have been a number of special federal tax breaks that have been granted to the oil and gas industry from the immediate expensing of tangible drilling costs to generous percentage depletion rates. These incentive also lower state income tax liabilities; in addition Pennsylvania has a number of manufacturing breaks that the industry can use as well as tax credits that can help cut payments to the state.

Gov. Tom Corbett opposes an extraction tax, as do industry groups including the Marcellus Shale Coalition.

“While this organization [PBPC] continues to repackage its call for new, even higher taxes and bigger government, Pennsylvania’s natural gas industry is squarely focused on creating more private sector jobs, especially along the supply chain and improving our region’s manufacturing base, generating more revenue, and producing homegrown energy that is stabilizing consumer costs. Unfortunately, shortsighted election-year calls for new taxes on one of our most promising industries will lead to fewer jobs, lower energy production and less tax revenues,” said a Marcellus Shale Coalition spokesman.

The call for a severance tax comes following a report from the Pennsylvania Budget and Policy Center which found that while the gas boom continues, corporate tax payments continue to decline. The report can be found online.