Since the late 2000s, Pennsylvania editorial boards have weighed in periodically on Pennsylvania’s need to enact a “real” severance tax on the value of gas extracted each year, like taxes that exist in every other major gas-producing state. In this press memo, we share our recent report that makes clear that now would be a good time for editorial boards to weigh in again.
To: Editorial Page Editors, Editorial Board Members, Columnists, and Other Interested Parties
From: Stephen Herzenberg, Executive Director, Keystone Research Center
Date: June 28, 2017
Re: Why Editorial Boards Should Weigh In on Pennsylvania’s Needs for a Real Severance Tax Now
Since the late 2000s, Pennsylvania editorial boards have weighed in periodically on Pennsylvania’s need to enact a “real” severance tax on the value of gas extracted each year, like taxes that exist in every other major gas-producing state. A new report by the Pennsylvania Budget and Policy Center (PBPC) makes clear that now would be a good time for editorial boards to weigh in again.
Since 2015, debate about a severance tax has ebbed. A glut of gas depressed Pennsylvania prices because we lacked the pipelines to transport gas to less depressed markets. Low prices allowed drillers to add the cry of “poverty” to their usual overinflated claims about the impact of a tax on investment and jobs or the amount that drilling companies already pay in other taxes. Now, with more pipelines operating, prices are rebounding and the amount of money Pennsylvania loses each year because it does not have a severance tax will grow rapidly.
Instead of a severance tax, Pennsylvania has a per well “impact fee.” Enacted under Gov. Corbett, the impact fee raises a bit of money from the gas industry, but it also allowed the governor to claim he had not violated his “no-tax” pledge. Since 2011 that impact fee has raised about $200 million per year on average. But here’s the rub: because impact fees are unrelated to the amount and value of gas extracted each year, collections are falling (from a peak of $221 million in 2011 to $173 million in 2016) even though production is now five times it’s 2011 level.
Worse, impact fees won’t grow much as prices recover and the market value of gas extracted grows. The Independent Fiscal Office projects that prices will recover to $2.62 per thousand cubic feet in 2018 (from a trough of $1.43 in 2015), and that the market value of gas from Pennsylvania unconventional gas wells will grow 80% from 2016 to 2018. The amount collected in impact fees will barely change. As this happens, the effective tax rate on unconventional gas extraction in Pennsylvania because of the impact fee will drop to a third the level of the West Virginia severance tax — and then down from there.
Pennsylvania is now losing nearly half a billion dollars annually because of the lack of a severance tax like West Virginia’s — or like Republican representative Kate Harper’s bill, which imposes a 3.5% severance tax on top of the current impact fee. As production grows and prices rebound to more than $3 per thousand cubic feet by 2021, lost revenues will rise further.
The new PBPC brief shows that, as well as paying less in impact fees, drilling companies still pay little in corporate net income taxes — perhaps less than $10 million annually and certainly less than $40 million, a tiny fraction of the revenue lost because we lack a severance tax. In 2017, two thirds of Pennsylvania gas drillers are structured as “pass through entities,” many of which pay Pennsylvania’s 3.07% personal income tax rate on their income, not the 9.99% corporate net income tax (CNIT). For those subject to the CNIT, federal and state tax breaks and corporate tax loopholes that shift reported profits out of Pennsylvania reduce drilling company taxes.
The current status quo is good for extraction companies’ profits, but not for Pennsylvanians. Without fair revenue coming in while our natural resources go out, it is no wonder that Pennsylvania ranks 47th in the nation in terms of per capita investment in higher education, while natural gas-rich Wyoming, North Dakota, and Alaska rank first, second and fourth — or that we rank 46th in the nation measured by the state share of K-12 education funding.
Pennsylvania’s lack of a severance tax is about to become an even bigger windfall for gas companies. We hope editorial boards will encourage lawmakers to end this windfall before it grows. With six months left in the tax year, a severance tax can make this year’s budget better for people in Pennsylvania. Long term, it can contribute even more to the people, economy, and infrastructure of our state.