The idea of a severance tax on natural gas production in Pennsylvania is again alive in Harrisburg.
The state House in June approved a resolution directing the nonpartisan Legislative Budget and Finance Committee to “compare impact fees and severance taxes in the largest natural gas producing states and examine the competitive business climate for the industry in those states.” Pennsylvania is the second largest gas-producing state in the United States.
Thirty-four gas-producing states have imposed a severance tax on gas extraction, which charges operators based on the amount of gas taken from a well. However, when unconventional gas production ramped up in Pennsylvania, the state legislature in 2012 instead adopted Act 13, which placed an impact fee on producers. That revenue is shared by counties and municipalities where gas production is occurring, as well as state agencies, according to a formula that takes into account the age of the well, the current market price of natural gas, and the volume of natural gas produced.
Former Gov. Tom Wolf called for the imposition of a severance tax in each year of his administration but was met with strong opposition from Republican lawmakers and natural gas industry groups. Pennsylvania is second only to Texas in natural gas production, from the Marcellus and Utica shales. He proposed using the revenue to help fund education across the state. Impact fees are used by county and municipal governments for infrastructure projects and public safety in their communities.
While impact fees in 2022 reached a record high of $278.8 million, the yearly revenue has been on a roller coaster ride due to fluctuating numbers of wells drilled and the price of natural gas. Projections for 2023 are that the amount with decrease by about one-third due to lower prices and fewer new wells. Some have argued that a severance tax would provide a more stable revenue source since it is based solely on production.
The Independent Fiscal Office calculates an effective tax rate for gas production, which is equal to annual impact fee revenues divided by the total market value of unconventional natural gas production. It found that the ETR has declined from 2.2% to 0.8% in the past five years.
The Legislative Budget and Finance Committee will now look at the severance tax structure and competitive business climate in each of the top-five gas-producing states, along with other fees levied and other unique factors to determine if a severance tax might make sense in Pennsylvania.