Proposed PA Severance Tax Meets Modified Goldilocks Standard – Not Too Big or Too Small, But Just Right

Jan Jarrett |

To restore funding for education, boost economic development and strengthen oversight of the gas drilling industry, Governor Wolf proposed enacting a severance tax on gas drilling. Pennsylvania is the number two producer of natural gas in the country, but the only major producer without a severance tax.

According to a study by the U.S. Energy Information Administration, other major gas-producing states generate significant percentages of their revenue from severance taxes. Here are some states where severance taxes make up substantial shares of revenue:

  • Alaska — 72 percent
  • North Dakota — 54 percent
  • Wyoming — 39 percent
  • Texas — 11 percent

As the EIA notes, Pennsylvania “currently derives less than 1 percent of its revenues” from its impact fee per gas well. The EIA adds that, if Pennsylvania imposed a severance tax on production similar to West Virginia’s, which the governor has proposed, the revenues generated “would still be less than 3 percent of the state’s total tax collections”, and only a little above the national average of 2 percent. West Virginia’s severance tax, which applies to coal and other commodities in addition to gas drilling, generates about 12 percent of its total revenue.

As we’ve seen over the last several years, fossil fuel prices are volatile. So an over-reliance on severance taxes could expose states to sharp fluctuations in revenues that are painful when prices fall. At an anticipated 3 percent of Pennsylvania’s overall revenue, a West Virginia-like severance tax would generate stable, recurring revenue that could be used to adequately fund our schools and help repair the structural deficit while limiting the commonwealth’s reliance on it for total revenues.

The governor’s proposed severance tax is not too little, as is the current impact fee, and not too large of a portion of total state revenue. It’s just right.