PA Budget Policy Center: Severance Tax Would Bring In At Least 3x Drilling Impact Fee

A severance tax on natural gas, which every other major gas-producing state already has in place, will generate significantly more revenue for Pennsylvania than the current impact fee, even at lower gas prices, according to an updated analysis by the PA Budget and Policy Center.

In 2015-16, a 5 percent severance tax would yield $675 million at a natural gas price of $2.67 per thousand cubic feet (MCF) – two-and-a-half times the estimated impact fee of $270 million.  

Assuming a middling estimate of $3.48 per MCF, an estimate derived from the U.S. Energy Information Administration price forecast discounted for Pennsylvania’s lower gas prices, it would raise $881 million, more than three times the estimated impact fee.

Pennsylvania faces a budget shortfall of $2 billion for 2014-15, a shortfall that could have been reduced considerably if the General Assembly had enacted a severance tax earlier this year, when the depth of the projected shortfall was already known.

Public support for a severance tax has been demonstrated in numerous polls throughout the fall, and was a key part of Gov.-elect Wolf’s campaign platform.

The Marcellus Shale Coalition, speaking on behalf of the natural gas industry, has raised the point that short-term prices for natural gas at some hubs distributing Pennsylvania natural gas have fallen below the national benchmark price.

Even at lower prices, which are expected to reverse once planned pipelines come on line, the severance tax will raise many times more than the impact fee. A 5 percent severance tax will raise $1 billion annually, if not in 2015-16, then soon after.

Of greater concern than the price of natural gas are “accounting measures” gas companies will seek to have written into the law that will significantly reduce severance tax revenue. The process is similar to that which is already familiar to Pennsylvania royalty owners who have seen their royalty checks greatly diminished because of deductions in the fine print.

But the industry’s focus on future gas price estimates masks the real issue.

As PBPC Research Director Michael Wood has noted, “Whether the tax would bring in $1 billion or $800 million at a specific point isn’t the real question. The real question is whether a severance tax would be a better deal for Pennsylvania or not. The answer is yes.”

A severance tax is based on both the amount of gas produced and the price of the gas.  Even at lower gas prices, the tax would still raise significantly more revenue than Pennsylvania’s current impact fee, which is based on number of wells drilled each year and the price of natural gas.

The impact fee generated an estimated $224 million in 2013-14. The estimate in Monday’s Associated Press story of what a 5 percent severance tax would bring in at current gas prices -- $675 million – is more than three times that amount, and would make a significant dent in the state’s $2 billion budget shortfall next year.

For more background, go to the PA Budget and Policy Center’s Marcellus Shale Tax Policy webpage.