Natural Gas Severance Tax or Impact Fee – A False Choice

Jan Jarrett |

Pennsylvania should enact a severance tax on natural gas production. The need to enact a severance tax will not change regardless of the outcome of current, protracted budget debate between the Republican-controlled General Assembly and the Wolf administration.

Pennsylvania remains the only major gas-producing state without a severance tax. A severance tax is a common and appropriate way to ensure that gas drillers compensate taxpayers for the depletion of one of the Commonwealth’s valuable natural resources, pay for the damage drilling does to local infrastructure and higher costs for the increased demand for local government services, and contribute their fair share to improving the quality of life for all Pennsylvanians.

The current impact fee is inadequate, and this year, it will bring in less revenue than it has since 2012. The Independent Fiscal Office projected (IFO) that, despite soaring natural gas production, the impact fee will generate only $189.6 million this year, compared to $223.5 million last year. And because of generous federal and state tax breaks, gas drillers paid less in state corporate taxes than they did at the beginning of the shale boom in 2008.

Governor Wolf originally proposed enacting a 5 percent severance tax on the price of gas at the wellhead plus $0.047 per thousand cubic feet (Mcf) of production. His original proposal would have replaced the impact fee with the severance tax, but would have guaranteed that local governments would continue to receive impact fee revenue set at its highest level. The IFO estimated that a severance tax at Wolf’s original proposed level would yield just shy of a billion dollars based on a full year of production. Those revenue estimates assumed a minimum price of $2.97 per Mcf. Natural gas prices so far (through October) will average 2.83 per Mcf. So current prices even at historic lows are only slightly below the minimum price that was assumed in the IFO estimates.

The governor subsequently offered a compromise proposal that lowered the tax rate to 3.5 percent, retained the $0.047 production tax, and retained the impact fee as is. In October, the Democratic House Appropriations Committee calculated that Wolf’s compromise proposal would raise $389 million in 2016-17. That amount by itself is well over one-and-half times the current IFO projections for the impact fee.

The impact fee appropriately returns substantial revenue to the communities that bear the burdens of gas drilling, but the impacts of drilling are felt statewide in increased pollution and health costs and additional duties imposed on state agencies. Pennsylvania needs both—a severance tax that raises revenue that can be used to benefit all citizens and an impact fee to directly assist gas patch communities.