Governor Wolf’s 2018 Severance Tax Proposal Could Bring in $1.7 Billion of Revenue Over the Next Five Years

By Diana Polson, PBPC Policy Analyst

READ THE FULL POLICY BRIEF HERE.

In 2014, Pennsylvania became the second-largest natural gas producer in the U.S. and remains so today, behind only Texas.  In 2017, gas production exceeded 5.3 trillion cubic feet and continues to rise. Despite rising production, Pennsylvania remains the only major gas-producing state that allows companies to drill without paying taxes that increase with the volume of gas extracted.

Drilling companies do not make up for Pennsylvania’s lack of a severance tax by paying the currently established impact fee, which is a “per well” amount independent of the volume of gas extracted from the well. As a result, while gas production has increased five-fold since 2011, impact fee payments have not increased five-fold as they would with a severance tax — instead, revenues raised from the impact fee have fluctuated between $173 and $227 million based on the number of wells drilled.

Governor Wolf proposed a severance tax as a part of his 2018-19 Executive Budget. The tax rate would be tied to the price of natural gas and the collected tax would increase with the amount of gas produced. Even though projections of future gas prices have fallen in the last year, Governor Wolf’s proposal is projected to bring in more than $200 million next year and roughly $400 million starting in 2021-22.  Over the next five years, this severance tax would bring in a projected $1.7 billion to the state. The funds raised from the severance tax would be an addition to the current impact fee, which would remain in place. Together, the impact fee and severance tax would put Pennsylvania’s natural gas extraction taxes roughly on a par with other major gas-drilling states, with a lifetime effective tax rate of 4%.

Pennsylvania cannot afford to leave this money on the table any longer, given the state’s desperate need for revenue to invest in education, human services, environmental protection, and job creation. 

Impact Fee Payments Hover at Around $200 Million As Gas Production Mushrooms

Pennsylvania’s impact fee charges companies a fee for each well they drill. The fee is based on the number of years since a well was drilled and the price of natural gas (but not the amount or value of gas extracted). There has been a steady increase in the number of horizontal wells and in gas production since 2011. (Figures 1 and 2). Yet Figure 3 shows that more wells and gas production have not meant more revenue for the state. Impact fee revenue has hovered between $173 and $227 million and has not steadily increased as gas production has since 2011. 

Figure 1 (click to enlarge):

Figure 2 (click to enlarge):

 

Figure 3 (click to enlarge):  

State legislators and former governor Tom Corbett structured the impact fee as a per-well fee rather than as a severance tax tied to the volume or market value of gas produced in the state. They did this, in part, so it could be labeled a “fee,” not a tax. As a result, the impact fee fails to provide a steady source of revenue that grows with the volume and value of gas produced in the state.

Forgoing a severance tax and lowering overall taxes on drilling companies has not led to an increase in drilling or production relative to neighboring states.  Instead, Pennsylvania is allowing companies to extract natural gas without paying a severance tax which would help the state address any budget deficits it may face and pay for essential investments and services such as education, health care, and human services.