Pennsylvanians Shortchanged by Drilling Fee

Sharon Ward |

Last week, the Pennsylvania Public Utility Commission reported that natural gas drillers are paying $202 million in local impact fees this year. Sounds good until you see a new report from the Pennsylvania Budget and Policy Center (PBPC) showing that a moderate severance tax on gas could bring in twice as much as the fee does now and generate more than $1 billion annually by the end of the decade.

Production growth in the Marcellus Shale, despite low market prices, drove the economic value of natural gas from $1.6 billion to $3.9 billion between the second half of 2010 and the second half of 2012. Despite that, impact fee revenues have remained flat year over year—around $200 million.

Impact fee revenues are projected to increase in future years but not as robustly as production is expected to increase—even if drilling and prices stay low. This is largely because of the unusual structure of Pennsylvania’s local impact fee, which is based on the price of natural gas and the year in which a well is drilled. As a result, the effective rate of the fee falls to 2% or less in future years—much lower than drilling tax rates in major energy-producing states like Montana and North Dakota.

A 4% natural gas severance tax could generate between $434 million and $490 million for Pennsylvania in 2013-14 (depending on factors like the number of wells drilled and gas prices), about twice as much as the $228 million to $229 million the impact fee is expected to bring in, By 2019-20, a severance tax could generate between $658 million and $1.2 billion, two to three times as much as the impact is estimated to bring in.

The natural gas industry is seeking to export liquid natural gas to markets out of the state and outside the U.S. where it will command significantly higher prices. An artificially low impact fee will essentially subsidize out-of-state or overseas natural gas customers at the expense of Pennsylvania schools and services.

Now is the time for state lawmakers to consider replacing the state’s impact fee with a reasonable severance tax on natural gas production. A tax modeled after other energy-producing states could go a long way to restoring funding that has been cut to schools and communities, while still providing as much funding to local governments as the impact fee.