Resurrecting the severance tax debate

Mar. 4—It's been more than a decade since the "Severance Tax" debate began with the surge in natural gas production in Pennsylvania thanks to fracking technology. And if you forgot, the severance tax idea lost.

Instead of taxing a percentage of the price of gas at the wellhead and a small charge per thousand cubic feet of production — the type of severance tax proposed by then Gov. Tom Wolf in 2015 — Pennsylvania has stuck with the impact fee chosen over a severance tax in 2012, linked primarily to the number of wells in production and the drilling of new wells, not the quantity of gas extracted. Wolf's proposal died in a Republican-led state legislature.

This week the Pennsylvania Budget and Policy Center, a longtime advocate for a severance tax, resurrected the idea during an online media conference, citing a change in leadership in the state house, an operational deficit expected to develop in the state budget, and a recent Commonwealth Court ruling that the state is not adequately funding public education.

"Pennsylvania must secure new, reliable and recurring sources of revenue from those with the most ability to pay," Budget and Policy Center Director Marc Stier said at the start of the media conference.

Stier noted that, despite a $13 billion surplus in state coffers, the state is projected to start running an operating deficit in the fiscal year that begins July 1. Gov. Josh Shapiro, a Democrat, is expected to kick off the budgeting process with his proposed budget Tuesday. Citing corporate tax cuts and the end of federal COVID-19 relief funds, the Budget and Policy Center has projected annual deficits in the state budget totaling $12.9 billion through the next five years. State Treasurer Stacy Garrity, a Republican, has also warned of potential deficits in the billions.

Stier argued the looming deficits will be made worse as the state tries to respond to the court decision on education funding.

In that case, last month the judge sided decisively with advocacy groups, several school districts (including Wilkes-Barre Area) and parents (including a Wilkes-Barre mother) who filed suit in 2014. They contended the current system of school funding violates the Pennsylvania Constitution by underfunding public education through an inequitable system that leaves students in lower-income districts behind academically.

The judge did not provide a specific remedy, saying instead that "it is now the obligation of the legislature, executive branch and educators" to fix the problem. Advocates have estimated the state will need to increase money for education by more than $4 billion a year.

Stier argued that a severance tax could fill the need for many years. Depending on the price of gas, the Center estimates such a tax would raise between $400 million and $1.5 billion per year. He noted Pennsylvania has been the second-largest producer of natural gas in the country, yet remains the only state without a severance tax. The Center proposes maintaining the impact fee while adding the severance tax.

Stier argued that it is clear, when looking at production in other states, that a severance tax does not discourage companies from drilling, and that demand is almost certainly going to keep increasing, in part because Europe has turned away from Russian energy supplies in the wake of the war in Ukraine.

He said historically the impact fee has remained relatively flat, raising between about $200 million and $275 million a year, while the value of gas being extracted has climbed, more than doubling from 2021 to 2022, from about $17.7 billion to $40.1 billion. In 2011 the value of extracted gas was $3.7 billion. A chart he presented showed, however, that the increase has not been steady, with the total value dropping to a $3 billion low in 2015 and hitting only $3.8 billion in 2016.

But that hinges on the sale price. While the value may have bounced a bit since 2011, Stier presented another chart showing gas production has climbed every year, from 1,066 billion cubic feet in 2011 to an estimate 7,600 billion cubic feet in 2022.

And Stier largely dismissed one of the frequent arguments against a severance tax: That the companies make up for the lost revenue through other taxes. He noted two-thirds of gas companies in Pennsylvania avoid paying state corporate taxes by structuring their drilling operations as pass-through entities, meaning they pay the state 3.07% personal income tax rate, not the higher corporate tax rates. Those that don't operate as pass-through entities can still lower state tax liability by using federal loopholes, he added.

The bottom line, Stier said, is that according to Center estimates, a 5% severance tax would have raised an additional $1.9 billion more from natural gas drilling from 2011 to 2021. Because of the big surge in prices in 2022, the Center estimates the state lost out on about $1.7 billion in that single year.

"Our plan is a severance tax added to the impact fee," he said. "The total effective tax would still be below Oklahoma and Texas. We don't expect an impact on drilling in Pennsylvania. They will keep drilling, just as they keep drilling in Oklahoma and Texas.

Reach Mark Guydish at 570-991-6112 or on Twitter @TLMarkGuydish