In recent months — and weeks — Pennsylvania’s legislature has shown renewed interest in enacting a severance tax on natural gas extraction as part of the state’s overdue revenue package to fund the state budget. In response, the natural gas industry has maintained a steady drumbeat of communications claiming that Pennsylvania already has a tax on gas extraction because of its per well impact fee which does not rise with the volume or value of gas drilled. The industry and its allies also continue to claim that Pennsylvania’s impact fee amounts to a tax that is higher (relative to the volume or value of gas produced) than the severance taxes in many other states.
This past weekend, for example, a letter from the Marcellus Shale Coalition to the Philadelphia Inquirer, stated that “As to the tired claims that natural gas producers ‘don’t pay their fair share’? Pennsylvania’s impact fee has generated more than $1.2 billion in new revenue and brought in more last year than the severance tax collections from Ohio, West Virginia, Colorado and Arkansas, combined. Those states, by the way, produced more natural gas than the Commonwealth.”
We decided to fact check these claims (see this brief for the details).
Much to our surprise, and yours too, we are sure, these claims reflect the selective use of data — cherry picking! While technically true, they give a false impression that Pennsylvania’s revenues per amount of gas extracted with the impact fee are similar to those of states with a severance tax. Of eight states with severance taxes (the biggest gas-producing states including the four referred to by the letter), only Ohio’s in 2016 raised less money per volume of gas extracted. By combining Ohio with three other states, the letter writers created a group of four states with 1% more volume of gas extracted in 2016 than Pennsylvania and a similar amount of gas extracted. When you look at the states individually, as the bar chart below shows, it becomes clear that Pennsylvania’s impact fee delivers a lot less revenue per volume of gas than most severance taxes. (Also, Ohio, get yourself a real severance tax!)
A second bar chart in our brief presents the Independent Fiscal Office’s April estimate of the (lifetime) effective tax rate with Pennsylvania’s impact fee versus severance taxes in seven other states. Pennsylvania’s impact fee in these estimates is roughly equal to Ohio’s lame severance tax. It is only 40% or less of the other severance taxes. Bottom line: if Pennsylvania imposed a severance tax of 2.1% to 3.6% it would, combined with the impact fee, have an overall tax rate on gas extraction within the range of these other states.