Natural Gas Severance Taxes
Governor Rendell has proposed a severance tax on natural gas extraction. If passed, natural gas will be the only energy source whose extraction is taxed in Pennsylvania. House Bill 1489 would impose a severance tax of 5% on the value of natural gas, plus $.047 per thousand cubic feet, with an exemption for marginal wells producing less than 60,000 cubic feet per day. This proposal would send almost 90% of the revenue to the state General Fund. The latest proposal, H.B 325, would impose a tax of 8%, plus $.07 per thousand cubic feet-sending 80% of the revenue to the General Fund.
Advocates for the tax claim that it is designed to resemble West Virginia's severance tax and would not discourage in-state drilling. Yet, West Virginia has seen a 20% increase in drilling activity in the last 10 years, while Pennsylvania, with no severance tax, has seen a 400% increase during the same period. Since, the beginning of 2009, West Virginia has added two additional drilling rigs, while Pennsylvania has added 56.33.
Politicians argue Pennsylvania is the only major gas-producing state not to impose this type of tax, and therefore should have one. This statement neglects important economic facts. First, no other industry in the state pays an excise tax to "sever" natural resources. The majority of other states that have a severance tax on natural gas also tax the extraction of stone, salt, timber, oil, etc. Second, states with a natural gas tax often delay implementation, offer tax exemptions or credits, or discount the tax in hard-to-drill areas to encourage drilling. Texas and Arkansas reduced their severance tax for high-cost gas wells by nearly 80%.
Pennsylvania's Marcellus Shale is an unconventional energy source and requires additional effort and cost to extract the natural gas. Therefore, it is more accurate to compare taxation in states with comparable shale formations. Such states often offer a moratorium on any sort of severance tax until the industry recovers its investment and becomes profitable.