For the fifth time in 5 years, Pennsylvania Gov. Tom Wolf has proposed a severance tax on oil and gas production to raise money for his government to spend. This occurs in the state that now ranks second in the US in production of natural gas. It’s the state producing enough gas to reverse North American flows of the commodity and to help the US become a net gas exporter.
It’s also the state, however, where many producers are cutting budgets and drilling plans, victims of price weakness born of a supply surge created by their work and the lagging development of transportation capacity.
More money
Governors convinced of the need for more money, of course, just want more money.
Wolf needs money for what he calls “a major infrastructure initiative”: spending by the state of $4.5 billion over 4 years on projects related to high-speed internet, flood control, business downstream of gas production, revitalization, and transportation. The work would be “funded by the monetization of a common-sense severance tax,” he said when he announced the initiative on Jan. 31. “It is far past time that Pennsylvanians stop allowing our commonwealth to be the only state losing out on the opportunity to reinvest in our communities. And as long as that is allowed to continue, my vision of a restored Pennsylvania that is ready to compete in the 21st-century economy will never become reality.”
The governor’s implication about missed opportunity is misplaced. It’s true that Pennsylvania imposes no severance tax on its growing output of natural gas from the Marcellus and Utica shales. But state and local governments profit from gas production in other ways.
Instead of a severance tax, the state General Assembly in 2012 created an “impact fee” paid by producers well by well at rates dependent on the price of gas and well age. The Pennsylvania Public Utility Commission collects the tax annually and distributes proceeds. The money goes to counties for specified uses, mostly related to infrastructure, and to state agencies and environmental programs.
The annual impact-fee remittance last year was $209.6 million, bringing the total since 2012 to more than $1.4 billion. Pennsylvania’s Independent Fiscal Office expects the remittance in April this year to be $247 billion. In comparison with severance-tax receipts by other oil and gas-producing states, these numbers are not grand. It’s probably on that basis that Wolf claims his state misses something.
But comparing impact-fee collections with severance-tax receipts elsewhere doesn’t tell the whole story. Pennsylvania taxes personal income at 3.07%, which is low in comparison with rates in other states, and corporate net income at 9.9%, which is high. It taxes sales at 6%, earning it a Tax Foundation ranking of 16 among 45 states with sales levies. For comparison, top-ranked California taxes sales at 7.25%.
From these and other levies, Pennsylvania’s total tax receipts for the financial year that ended last June were up 4% from the previous year, which combined with spending cuts produced a budget surplus. For the first time in a decade, the commonwealth was able to deposit $22 million into its Budget Stabilization Reserve Fund, according to the Department of Revenue. So far this year, the department reported on Feb. 1, tax receipts are 5.7% ahead of the same period a year ago.
Precarious time
The addition of a severance tax, especially at the high rate of 8.5% Wolf has proposed in the past, would discourage drilling at a precarious time and limit growth in gas production. It thus would hurt activities now strongly boosting the Pennsylvanian economy and helping to restore the industrial base. And to the extent a severance tax lowered drilling and production it would shrink revenue from other levies and fees.
Thanks greatly to shale gas, progress toward the “restored Pennsylvania” of Wolf’s vision already has begun. Sapping the economic renaissance to supplement state project-funding would backfire fiscally and represent a costly mistake.
