Enacting a severance tax on natural gas would raise much-needed funding for education, environmental, and other critical services and help close the projected $2 billion budget shortfall in the 2015-16 budget. With support from Governor Wolf and many legislators on both sides of the aisle, 2015 could be the year when Pennsylvania finally enacts a severance tax on the withdrawal of this valuable one-time natural resource.
Even though the new legislative session is only a month old, lawmakers have already come forward with several natural gas severance tax proposals. Here is a brief look at some of the plans announced so far (in no particular order).
Uses of Funding
|Governor Wolf||5%||Not known||Details likely next month as part of budget proposal|
|Harper||HB 82||3.5%||All proceeds go to school employee pension system to pay down pension debt (unfunded liability)||Tax is on top of Act 13 impact fee|
|DiGirolamo, DeLissio, Murt, and Readshaw||Not yet assigned||3.2%||40% to basic education, 35% to pension debt,
15% to human services,
10% for environment program funding
|Tax is on top of Act 13 impact fee – making total effective tax rate approximately 5%|
|Brewster||SB 395||5%||Distributed to school districts in same ratio as basic education funding||Drillers receive dollar-for-dollar credit against tax for impact fee payments|
|Haywood||Not yet assigned||8%||$100 million per year for Growing Greener, rest split 60% for public schools, 40% for pension debt|
|McGarrigle||Not yet assigned||4%||Education||Reintroduction of SB 1349 from last legislative session|
Why all the interest in a severance tax?
Pennsylvania is now the second largest natural gas producing state in the U.S. but has seen little in growth in the tax revenue from this increased economic activity. Other large oil and gas producing states (Texas and North Dakota, in particular) have seen their state revenues boom due to increased severance tax collections.
Since 2012, Pennsylvania has had an impact fee, but it equates to a tax rate of less than 2% of the value of natural gas produced and little of it is used to fund basic statewide needs.
Impact fee collections totaled $226 million last year. Communities that host shale wells (counties and municipalities, but not schools) received 60% of these collections and are permitted to use the funds for a wide array of uses. Impacts from other oil and gas activities—such as pipelines and processing facilities—are not included in the impact fee.
Due to a 2002 Pennsylvania Supreme Court ruling, oil and natural gas deposits are not subject to local property taxes – unlike coal, gravel, and other mineral deposits.
Neighboring West Virginia has a 5% severance tax that largely goes to its General Fund and a $0.47 per thousand cubic feet (MCF) tax that is used to pay off workers’ compensation fund debt. Natural gas deposits are subject to property tax in West Virginia, so production increases property tax payments to local governments—counties, municipalities, and schools.
Many agree that Pennsylvania should ask more from drillers. A well-designed severance tax, along with strong protections for our health and environment, would be a long-awaited step in the right direction.