Guest Column: Natural Gas Severance Tax: Still A Bad Idea

Published: March 27, 2010

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In the coming months, debate on a proposed natural gas severance tax will heat up as legislators attempt to pass a balanced budget before June 30. Last year, lawmakers and Governor Rendell decided that taxing companies in their infancy would have crippled them. Facing another budget shortfall, Governor Rendell has now decided drilling companies can afford to pay and additional tax- but the harmful effects remain unchanged.

The proposed severance tax would take 5 percent of the value plus 4.7 cents per thousand cubic feet of extracted natural gas. In addition, the governor would continue leasing state lands to drilling companies in order to pull in an extra $180 million in revenue.

Rendell's argument that all other gas producing states have a severance tax only tells part of the story. Most of these states exempt horizontally-drilled wells (which are typical in the Marcellus Shale region). Oklahoma exempts these wells until the company recovers its investment. In Texas, these high-cost wells receive an 80 percent tax deduction. And Florida provides tax credits to small oil and gas producers. Moreover, these states' overall tax burdens are lower than Pennsylvania's 11th highest in the nation.

Rendell's "fair share" argument is further undermined by the fact that drilling companies already pay either the highest Corporate Net Income Tax in the world or the Personal Income Tax, plus the Capital Stock and Franchise Tax, leasing fees, and royalties, and they finance bonds to maintain local infrastructure.

Despite these costs, some gas companies are eager to invest in the Commonwealth. However, Gov. Rendell remains determined to tax energy sources that are creating permanent jobs to subsidize alternative energies unable to survive on their own merits.

Some lawmakers are proposing a five-year moratorium on drilling in state lands until the environmental effects are better understood. Yet the fracking process used in horizontal drilling has been utilized for decades with an excellent track record. A Penn State University study found that more than 95 percent of complaints received from homeowners suspecting contamination from gas drilling were actually due to preexisting problems or other activities such as agriculture. And when drilling sites are cited for infractions those problems are typically minor and easily corrected. Lawmakers who worry about the environmental impact should be mollified by the lack of evidence of water contamination due to Marcellus Shale drilling.

Others believe that a natural gas tax is necessary to pay for increased regulatory costs. Creating a new revenue source is unnecessary to deal with potential contamination. If pollution occurs, fines and penalties levied by the Department of Environmental Protection (DEP) should cover the clean-up costs. Better yet, local problems should be addressed by local government in cooperation with the DEP. One example is the wear and tear on roads from increased truck traffic. Drilling companies are already accountable for any damaged roads or infrastructure, and in many cases roads have actually improved since drilling began. For example, Range Resources has spent more than $4 million in the last two years rebuilding roads and new bridges in three local communities in Western Pennsylvania.

If a severance tax is enacted, property owners' royalties will be taxed, and companies may choose to focus investment in other shale deposits around the United States. Recently, Devon Energy CEO Larry Nichols cited the "political problems" in Pennsylvania that dissuaded his company from investing in the region. State government is driving away these businesses while spending billions to attract other politically favored businesses. None of the above proposals effectively addresses the root problems of government overspending, which is why 90 percent of the proposed severance tax is going to the state General Fund, not for local environments or infrastructure.

Arguments in favor of the severance tax ignore a host of benefits the drilling companies are already providing, including: lease payments to the state treasury, royalties and signing bonuses to citizens, tax revenue through traditional sources, road repairs, and most importantly, thousands of jobs. Lester Lave, a Carnegie Mellon University professor and co-director of the university's Electricity Industry Center, recently said, "You could have a blue-collar boom here. Cheap gas really could stimulate industry, everything from glass making, to fertilizer, to power plants- a lot of industries run on cheap fuel."

The Marcellus Shale boom is accomplishing something that all of Governor Rendell's economic development programs cannot: permanent jobs and more state tax revenue without a dime of taxpayer subsidies. Resisting the calls to tax natural gas producers will ensure Pennsylvania maintains a competitive edge without compromising our fiscal health or natural resources.

Editor's Note: Elizabeth Bryan is a research associate at the Commonwealth Foundation (CommonwealthFoundation.org), an independent, nonprofit public policy research and educational institute based in Harrisburg.

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15 posted comments

It's not a bad idea - it's a very necessary idea. Now downside, but we must hold out elected reps responsible to see that the money comes here, not to harrisburg or Philly.
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Steven,  03/31/10 1:39
Vote YES for a severance tax. Don't support any candidate for any state office who doesn't support a severance tax. We have exceptional shale gas here and the gas companies will not be negatively impacted.
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Yes to Severance tax,  03/30/10 9:33
Paul, You are right on the money, for the most part. But there are small landowners, who will gain a little from the gas business, who mostly would like to see the county and our area remain as close to what we once had as possible. They would vote overwhelmingly for a strong severance tax if the money could be used locally, and if it would slow down the industry or force it to behave responsibly. The ones who stand to get rich are a small minority. The ones who will not be affected except by poorer roads and destroyed scenery are in the huge majority. If a severance tax can provide them any relief, it should be as large as it can be. But keep the money here, please. That's probably beyond the ability of the legislators we have elected, and we should remember this at election time.
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yes tax,  03/28/10 6:32
As Ms. Bryan is based in Harrisburg, she does not have to put up with the trucks, the roads, the noise, and the general degradation in our standard of living. By our standard of living, I mean the beautiful rural natural scenic beauty of our county. I don't care if the tax gets passed on to the landowner or to the consumer, which is me, because the lion's share of the consumer cost increase will be borne by those outside our area. The goal should be to use the bounty of the gas resources to compensate the county for our losses. We can do that by using the money to reduce property taxes, to offset the costs passed on to the landowner, and to create infrastructure improvements - our roads and bridges. The biggest hurdle remains, as stated here previously, how to make sure the severance tax funds are returned to the counties where the gas is being extracted, as we are the ones bearing the brunt of the downside. There is no reason Philadelphia should see a nickle of this revenue, but if our elected representatives are not strong in their support for our county, we will be shafted as we have in the past. From what we have seen, Pickett and Baker are wimps, and are surely unsuited to this task. Hopefully Gene Yaw will supply the backbone needed.
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think local first,  03/28/10 2:14
I'd like to see a breakdown poll of on the issue... how many people with a large gas lease, or a well on their property, support some sort of severance tax? How many people without a lease support it? What about the politicians getting kickbacks? Or the restaurant and hotel owners? I'm willing to bet that the opinions directly correspond to the amount of money received from the gas companies, not about whats right or wrong. The citizens and politicians who are getting money are against it, essentially arguing that a tax would lessen their personal gain. The citizens getting no money are typically for it, arguing that the vast majority of the us have to deal with the inconvenience and financial burden of the industry without a dime to show for it.
Despite the propaganda from the industry and the citizens/politicians who profit from the it, they aren't going anywhere. The gold is here. A severance tax isn't going to drive away this "blessing". While I agree that there needs to be some serious oversight as to where the money goes, I strongly support enacting some sort of severance tax and will fight tooth and nail for the citizens who are getting nothing but hardship from this corrupt industry and the greedy citizens it has turned against our once-great area.
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Paul,  03/28/10 1:14
If the gas companies oppose paying a severance tax here in Pennsylvania, what are they going to do, go elsewhere? The gas is here, and they should pay for the privilege of drilling. Ms. Bryan typically downplays the environmental harm and disruption to whole communities, as representatives of the Commonwealth Foundation always do, in favor of business interests. Failure to enact a severance tax will mean the taxpayers will bear the burden instead.
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Ben T.,  03/28/10 11:43
The question isn't whether to have a severance tax or not. The question is how to direct the severance tax revenues to the counties that are producing the gas. That's where the environmental damage is being done.
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Scott,  03/28/10 9:59
Why do you have this part of the column if you are not going to post?
Like everything you do, this makes no sense!
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dah,  03/28/10 7:41
Wrong, wrong, wrong! They are not going to go elsewhere. Ms. Bryan doesn't understand. There has never been a natural gas field ever discovered anywhere in the world that rivals what is under Bradford County. You can't drive these companies away with any level of regulation or taxation. They are coming here full force, because there's never been anything like this ever seen before, anywhere. We can extract a share of the money, and there will be tons of it, to compensate our county for the destruction that is necessarily going to occur because of the sheer number of wells that this field can support. Tax them until you push them to the point of marginalization, where it almost becomes more profitable for them to go elsewhere, and we can receive many millions of dollars in compensation for what they, by necessity, have to do to us. But don't let the "state" get their hands on it without first compensating the county for our loss. If we don't cover our own losses first, the money will go to Philadelphia, and we will become the wasteland we were following the timber and coal booms. Let's play it smart this time. You can't make them go away, but you can make them pay fairly to compensate us for our loss.
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learn from past mistakes,  03/27/10 6:59
If the gas companies weren't still making mega profits they would have been long gone the state needs to provide for their citizens this one way to do that with out raising property and sales tax revenue!
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Jack,  03/27/10 5:59
Ms. Bryan makes good points about the structure of the severance tax and the uses to which the revenues should be put. She also utterly fails in describing why the tax should not be levied.

I think that small producxers can be exempted; I think that holding off until expenses are recouped may not be a bad idea (although maybe the rate should then be higher); I believe that monies from leases in State Forests should be used to protect and expand our State Forests, Parks, and Gamelands --not the General Fund; and I believe that the application fees should be used for hiring inspectors, not the severance tax.

I also believe that any mining/extractive industry which takes minerals out of Pennsylvania and depletes those natural resources needs to pay a severance tax -- something I wish the coal mining industry was forced to do.

I also notice that the Commonwealth Foundation is not repeating the "fact" that Seneca Resources has been chased out of the State because of possible severance taxes, a canard that they created in an earlier screed against the tax. The Commonwealth Foundation is simply an apologist for the Oil and Gas Industry and an opponent of taxes in all forms without studying the fact that some taxes need to be levied on us to help provide services for the collective "us".

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Lee Woodmansee,  03/27/10 9:48
I hope this opinion stays here for a long time so as many people can read/comment on it so Harrisburg gets the message as well.
We have a fine man who is running for Governor & will not tax the gas companies. If taxed, the gas companies have already said it will trickle down to the land owners & the amount you expect to get on royalties will be less as well as taxed. DO YOU AS A LAND OWNER WANT THIS? I think not...then think again at the polls this May & then in Nov. Vote for Sam Rohrer.org to get your fair share & what is due you, don't give your money to the "general funds!"
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Sylvia Ellis,  03/27/10 8:08
Mr. Hosie, This letter should have been printed long before you and everyone else for the severence tax, opened mouth and inserted foot. Rendell was lying then and still is today, when he said we needed another tax(typical liberal democratic motive), which bandwagon all in that ilk jumped on.
This is why Rendell and all those politicians in Harrisburg need to go.

Vote for Sam Rohrer, he said he will not enact a gas severence tax, trim government waste and reform education. We need him in office.

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no new taxes,  03/27/10 8:04
I cannot recall the last time the Daily Review had a such a well written editorial.
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Peg,  03/27/10 7:38
I guess I can see both sides of the coin here, but somehow it looks like we are only beginning to see how much it is going to cost in additional man power to police the loads coming in not just for the gas companies, but for the trucks that are hired to work for them, because not all of them are so much on the "up and up," not to mention the additional DEP, or EPA workers whatever they end up deciding will take the ball in all of that, the additional costs to the already overstressed country roads, and then God forbid anything such as pollution of wells or soil does eventually arise. How will these things then be paid for if no such tax is instituted? Will the state then come in and take over? I would imagine most likely not. Will these companies stand behind their mistakes? My thoughts are probably doubtful, but possibly they will still be in business and moving into other states so lawsuits are likely. What a tangled mess this could turn out to be.
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Could become a difficult dilemma,  03/27/10 6:14