Gas Severance Tax a Necessary Evil

Washington PA Observer Reporter
26 May 2010

It's becoming pretty clear now that the natural gas industry will be here for a long time. Much of the state's surface is being gobbled up in leases, including 700,000 acres of state forest. Thousands of wells are being drilled. And now we learn that the Marcellus Shale isn't the only gas-bearing rock below us.

The Utica Shale and the Upper Devonian are at different levels than the Marcellus, but geologists say all three are layered in a column under Southwestern Pennsylvania. So, it may be possible to tap gas from these other layers from the same wells.

Within a few years, it is possible that Pennsylvania could be second only to Texas in natural gas production. But unless the state enacts a gas severance tax, we'll receive only collateral benefit from all this activity and an environmental mess we can't afford to clean up.

Among the 32 states that produce natural gas, 27 of them charge a severance tax. Pennsylvania, in fact, is one of just 11 states that impose no severance tax of any kind on its natural resources.

Currently, three bills proposing an extraction tax on gas are making their rounds in the Legislature. They differ in how much is collected, how the tax is assessed, and where the revenue goes.

We are not fond of new and additional taxes to conduct business as usual, and at least one of the bills proposes pumping 90 percent of the severance tax revenue into the state's general fund. This is a bad idea.

We do, however, favor a severance tax, primarily to pay for what is shaping up to be the enormous cost of monitoring the industry, protecting our water supplies and managing the damages to the environment, which, in the wake of the Gulf oil spill, should be considered probable rather than unlikely.

Part of the revenue from that tax ought to go for infrastructure improvements in the areas where the severance is taking place. It doesn't make much sense to spread the benefit of the tax evenly, lining the pockets of Allegheny County, for example, where almost no drilling is taking place, when the pain of extraction is localized in places like Washington and Greene counties.

Critics say a severance tax will kill the industry in its infancy, that the gas companies will pick up and move elsewhere. That's not going to happen. Texas, Oklahoma, New Mexico and Alaska all reap more than $1 billion a year each in gas-extraction taxes, and the industry has not left those places. Because the gas drillers pass those taxes on to gas suppliers and transporters, and the suppliers and transporters pass them on to customers, and because Pennsylvania imports four times as much gas as it produces, customers here are paying those severance taxes. A severance tax here will not hurt the drilling companies, because the tax will ultimately be passed onto customers, most being in other parts of the country and perhaps Canada.

As we have written before, no one wants to see this state's sales and income taxes increased, or our real estate taxes continue to rise. This state has done an abysmal job at controlling spending, and that must be addressed first. Even then, however, more revenue will be required to meet this state's obligations. We must increase revenue, but we should be doing it by imposing the no-brainer taxes first, like that on smokeless tobacco.

It's becoming clearer every day that a gas severance tax doesn't require much brain, either.