The People of America's Oil and Natural Gas Indusry

Study: Tax Proposal Could Cost PA

Mark Green

Mark Green
Posted May 7, 2015

The oil and natural gas industry’s recent tax revenue and economic contributions to the Commonwealth of Pennsylvania look like this:

  • More than $630 million through the state’s existing local impact fee since 2012, including $224 million in 2014 alone
  • More than $2.1 billion in state and local taxes
  • Annual contributions to the state economy of $34.7 billion, boosting the bottom lines of more than 1,300 businesses in the energy supply chain


Gov. Tom Wolf, who has proposed new industry taxes, says the state is “getting a bad deal.” We suspect a lot of states would like to have things so rough.

Nevertheless, the governor is pushing for an additional natural gas severance tax of 5 percent on the gross market value of production, plus a fixed fee of 4.7 cents per thousand cubic feet (Mcf) produced. The governor also wants an artificial floor of $2.97 per Mcf for the purpose of calculating the tax regardless of the actual price of natural gas. This proposed floor will increase the burden of the severance tax when natural gas prices are low - which are times when the industry is least capable of absorbing a cost increase. All suggest unfamiliarity with the story of the goose that laid golden eggs.

There’s new economic analysis buttressing the fable’s moral – that the desire for more may result in less – and that should guide lawmakers weighing the governor’s proposals. Indeed, the study by Timothy J. Considine of Natural Resource Economics, Inc., finds that with the severance tax less is likely – less energy activity, less production, much less anticipated net revenue for the state, fewer jobs.  Key results:

  • Fewer wells drilled – Reduction in the number by 1,364 from 2016 to 2025
  • Investment and production value losses – $11.5 billion in cumulative drilling investment loss from 2016 to 2025; $11.2 billion in cumulative losses in natural gas and liquids production over the same period
  • Reduced economic output – More than $20 billion in cumulative losses in value added or gross state product from investment and production losses
  • Job losses – Nearly 18,000 in reduced supported employment by 2025, relative to projected levels without the tax


The study found that severance tax revenues will be offset by elimination of the current impact fee and lower sales and income tax receipts due to reduced energy activity stemming from the severance tax. It estimated that net revenue to the state in 2016 would be $515 million, one-third less than the $765 million projected by the governor’s office. It also projects that net revenue to the state will be $492 million in 2020 and $565 million in 2025 – much less than the $1 billion per year estimated by supporters of the severance tax.

The study charts net revenue impacts like this:

revenues

Significantly, the study underscores the simple economic theory that if you tax something you’ll get less of that something. In this case that’s natural gas production, a key driver of the state economy in recent years. The study estimates the severance tax would reduce Pennsylvania’s natural gas output by more than 900 million cubic feet per day by as early as 2021, with a cumulative loss in production of 2.86 trillion cubic feet from 2016 to 2025. A study chart showing potential production losses:

production

The study:

These estimates are conservative, based upon projections of declining well productivity. If the productivity if Marcellus and Utica wells holds steady or increases, the economic losses from the severance could be much larger.

Stephanie Catarino Wissman, executive director of the Associated Petroleum Industries of Pennsylvania, who discussed the tax proposal during a conference call with reporters:

“Overall, this study confirms common sense and economic intuition. To quote from the report: ‘Taxing a highly productive industry that supports thousands of jobs and generates billions in economic output and millions in tax revenues has negative economic consequences for the Commonwealth of Pennsylvania.’ Safe, responsible natural gas development has been good for the state economy, good for local economies and good for Pennsylvanians. We want to keep it that way. Pennsylvanian jobs matter. State lawmakers should reject the severance tax so that the benefits of energy development continue to flow.”

Click here to join an online initiative to stop Pennsylvania's proposed severance tax.

ABOUT THE AUTHOR

Mark Green joined API after a career in newspaper journalism, including 16 years as national editorial writer for The Oklahoman in the paper’s Washington bureau. Mark also was a reporter, copy editor and sports editor. He earned his journalism degree from the University of Oklahoma and master’s in journalism and public affairs from American University. He and his wife Pamela live in Occoquan, Va., where they enjoy their four grandchildren.