Severance Tax is No Burden to Booming Industry

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As Pennsylvania legislators scramble to identify ways to balance the budget (no small task with a $1.5 billion deficit) one substantial source of revenue is once again up for discussion – a severance tax on natural gas production. A new report released by the Pennsylvania Budget and Policy Center found that natural gas company impact fee payments in Pennsylvania result in one of the lowest production tax rates in the country, just 1.9%. In 2013 they paid $223 million in impact fees while the market value of natural gas production topped $11.8 billion.

As Pennsylvania legislators scramble to identify ways to balance the budget (no small task with a $1.5 billion deficit) one substantial source of revenue is once again up for discussion – a severance tax on natural gas production. A new report released by the Pennsylvania Budget and Policy Center found that natural gas company impact fee payments in Pennsylvania result in one of the lowest production tax rates in the country, just 1.9%. In 2013 they paid $223 million in impact fees while the market value of natural gas production topped $11.8 billion.

Despite booming production, corporate tax payments from these companies have dropped significantly, with total receipts dropping from a high of $443 million in 2011 to $265 million in 2013. Most natural gas drilling companies were able to minimize or avoid altogether paying Pennsylvania’s corporate net income tax (CNIT) by organizing themselves as pass-through entities. Gas drilling companies paid only 0.5% of the total CNIT collected, and the drilling companies paid only 9% of the total remitted by the oil and gas industry. The balance came from pipeline, distribution and other support companies that work with the gas drillers.

The gas drilling industry argues that, because of other taxes levied by Pennsylvania, they cannot afford the added burden of a severance tax. These companies enjoy numerous tax credits and incentives at both the state and federal level. Because of their low operating costs and prime location near premium markets, researchers from Carnegie Mellon noted, “The goose that lays the golden egg is going nowhere.” A business exodus spurred by the enactment of a severance tax is very unlikely.

The absence of a fair severance tax is a bad deal for Pennsylvanians. A 5% severance tax in addition to the impact fee on natural gas companies can raise an additional $400 million for Pennsylvania. A $1.5 billion budget deficit and weak revenue collections is forcing legislators to make difficult choices. Rather than make devastating cuts to education, healthcare, and key investments for future economic growth, our lawmakers should consider a balanced approach that includes raising new revenues. Adopting a modest severance tax is not punitive or unfair. It is sound policy in a time of tight budgets.

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