It’s Time for a Real Severance Tax in Pennsylvania

By Stephen Herzenberg and Diana Polson



In 2014 Pennsylvania became the second-largest natural gas producer, extracting over four trillion cubic feet in the state. In 2016, gas production exceeded five trillion cubic feet. Despite rising production, however, Pennsylvania remains the only major gas-producing state allowing companies to drill without paying taxes on the value of gas extracted. 

Legislators on both sides of the aisle, and Governor Wolf, have all made proposals this year to enact severance taxes that would, together with the existing impact fee, raise the overall effective tax rate on the value of natural gas extracted (in most circumstances) to at least the 5% level that exists in West Virginia. This brief estimates the revenue for three alternative proposals: one that, combined with the impact fee, would raise the effective tax rate to 5%, one from Republican Representative Kate Harper that adds a 3.5% severance tax to the existing impact fee, and Gov. Wolf’s proposed 6.5% severance tax that would that allow companies to take the impact fee as a credit.

All three proposals would raise a half billion dollars or more for the 2018-19 budget and $217 million or more in the half of a tax year left that could contribute to the 2017-18 budget. Gov. Wolf’s proposal would raise an estimated $1.15 billion by 2021-22. Pennsylvania cannot afford to leave this money on the table any longer given the state’s desperate need for revenue to invest in education, critical life-enhancing services, environmental protection and job creation. 

This brief also shows that drilling companies are not making up for Pennsylvania’s lack of a severance tax by paying more in impact fees or corporate net income taxes (CNIT). Drilling companies paid less in impact fees and CNIT payments in 2016 than in 2011, when gas production was about one fifth the current level. Drillers are projected to pay less in impact fees even in 2018 than in 2011, even though the market value of gas extracted will have tripled. CNIT payments by drillers today and well below one tenth of the revenue lost from not having a real severance tax on the market value of gas extracted.