The People of America's Oil and Natural Gas Indusry

A Counterproductive Tax Proposal

Jane Van Ryan

Jane Van Ryan
Posted January 19, 2010

There's an old adage among economists that says, "If you tax something, you get less of it." Apparently Gov. Ed Rendell of Pennsylvania isn't familiar with that expression.

As reported in the Philadelphia Inquirer, Rendell plans to push for a new tax on natural gas extracted from the Marcellus Shale this year. As he struggles to find revenue for the Commonwealth's coffers, Rendell says, "The tax is appropriate, it's necessary, and it's a big help going forward."

Gov. Rendell first proposed a severance tax a year ago but became convinced that 2009 was too early to impose a tax on companies investing millions of dollars to drill in Pennsylvania. This year he is reviving the tax, citing higher-than-expected bids for leases in the Marcellus Shale region.

Last week, Pennsylvania received bids totaling $128.5 million for the right to drill for natural gas on state lands--twice as much money as expected. Also, the number of permits for natural gas drilling has tripled.

All of this is good news for Pennsylvania's economy because energy development is likely to create thousands of jobs, put cash in the state's treasury to provide funding for government services, and produce clean-burning energy.

But the benefits of natural gas production could be stymied by the imposition of a new tax. The Marcellus Shale Committee warns that the tax could encourage energy exploration and production companies to move to other states where more favorable tax approaches exist.

In a statement last year, the committee said that Pennsylvania's financial challenges "would be better addressed through an expansion of developing natural gas resources on state-owned land that would yield substantial immediate bonus payments and long-term royalty income for decades. This option would not only help create new jobs, it would also provide an immediate economic benefit that does not hinder growth..."

Observers say the governor's tax plan is likely to touch off a political battle in Harrisburg. Pennsylvania's elected officials should give serious consideration to whether Rendell's plan could hurt the economy more than help it.