The Severance Tax & the Budget: Flat on Our Backs Again?

Will Charlie Brown end up on his back again as Lucy whisks the football from the tee?

This budget season it looked like a severance tax on natural gas drilling was finally teed up to be successfully kicked through the uprights. Candidate Tom Wolf made it the centerpiece of his campaign for governor, vowing to use the revenue to replace the disastrous funding cuts to education made under former Gov. Tom Corbett. Voters rewarded Wolf with the governor’s office, and all subsequent polls show voters continue to strongly support a tax on gas drilling. All the public policy arguments are on the side of a drilling tax as well.

But recent news reports indicate a severance tax has been whisked from the budget negotiating table.

Gov. Wolf initially proposed a 5 percent tax on the value of the gas extracted from under our land and a 4.9-cents-per-MCF production tax – almost identical to the levy in place in neighboring West Virginia. His proposal would have directed the lion’s share of the revenue to education funding with smaller amounts earmarked for economic development, clean energy and oversight of the gas drilling industry. Again, polls showed that voters approved of his overall budget proposal and especially liked the tax on gas drilling.

The governor proposed compromises which Republican leaders simply rejected. By July, news reports indicated that the governor had dropped the proposed severance tax rate to 3.2 percent that would have been in addition to the existing impact fee, which goes to municipalities where drilling occurs.

In response, Republican leaders only stiffened their opposition to a severance tax, even though as production has soared, impact fee revenue has declined. Meanwhile, state corporate taxes paid by drillers have dropped below the amount they paid in 2008 at the start of the shale boom.

The shale industry claims it cannot afford a severance tax because its over-production has created a supply glut and lowered gas prices. Instead of cutting back on production, gas companies are looking to tap even more abundant gas resources in the Utica formation which lies underneath the Marcellus. The perverse economics of the industry promise to keep the prices low for many years to come.

From the perspective of the voters, now is the time to finally enact a severance tax in Pennsylvania as every other major gas-producing state has already done. From the perspective of the drillers, that time should never come, and they’ve spent $55 million (and counting) in campaign contributions and lobbying to ensure it never does.

If the gas drillers successfully pull the severance tax from the budget, Pennsylvania taxpayers are the ones who will land flat on their backs.

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