House Committee Considers Severance Tax, PBPC Offers Testimony

Click Read Michael Wood's Full Testimony

The Pennsylvania House Appropriations Committee's Subcommittee on Tax Policy recently examined the plan to introduce a severance tax on natural gas drilling in Pennsylvania.

Testifying at the April 3 hearing, PBPC Research Director Michael Wood highlighted just how common severance taxes are across the United States. Most natural gas-producing states assess a severance tax on drilling, and of the 14 states with greater production than Pennsylvania, all but California levy the tax.

Wood told lawmakers on the committee that Pennsylvania can learn several important lessons from other states' experiences with severance taxes as policymakers work to implement a well-structured tax that will protect Pennsylvania taxpayers from the future costs of natural gas drilling.

Interest in the severance tax has been stirred by the increasing extraction of natural gas from the Marcellus Shale, a deep geologic formation that spans West Virginia, Ohio, New York, and most of Western Pennsylvania. New drilling techniques and rising natural gas prices have made it both economically feasible and potentially highly profitable to exploit the vast gas reserves.

Based on the lessons of other states, Wood testified that a well–structured severance tax in Pennsylvania can:

  • Help repay governments for increased costs due to natural resource development;
  • Provide funding for cleanup – today and in the future; and
  • Help communities transition once the resource “boom” is over.

Twenty-seven of the 32 states that produce natural gas charge a severance tax on its production. Severance taxes of some kind are common in 35 of the 50 states.

Wood said natural resource extraction can produce side effects that are not readily apparent, such as acid mine drainage resulting from coal mining that is expected to cost taxpayers $15 billion to fix.

"Economists call these sorts of costs 'externalities' as they are created by economic activity, but not paid for by the firms receiving the economic benefit," Wood testified. "Severance taxes can be an effective mechanism for helping to internalize these costs."

Click Read Michael Wood's Full Testimony