October 10, 2014

Why Pennsylvania Should Not Enact a Severance Tax on Natural Gas

As the governor’s race heats up in Pennsylvania, one of the central issues is whether to enact a severance tax on natural gas. Democrat candidate Tom Wolf has emphasized the fact that Pennsylvania is the only state in the country without a severance tax. Critics of the status quo argue that the state is giving away its resources by not imposing such a tax. Those who oppose a severance tax emphasize that gas companies that drill in Pennsylvania pay other taxes, such as the corporate net income tax, so that the combined tax burden on business is higher than in other gas-producing states.

Some argue that having only an impact fee with no severance tax on gas in this state offsets other state taxes so that Pennsylvania can effectively compete with other states in attracting energy companies. Many of those who oppose the proposed tax on gas extraction are not opposed in principle to taxing resource extraction, but are rather concerned about how this tax will affect the total tax burden and the size of the state government, which they view as too large. Proponents of limiting the size of state government oppose a severance tax because the revenue will likely be used to support more state government spending rather than opening the door for reducing other taxes.

In his plan, candidate Wolf states that the revenue from a natural gas severance tax will be used to strategically invest in schools, infrastructure, and the development of clean energy alternatives. The question that needs to be asked is whether the state should be spending more money on any of those three areas.

Why do we need government to invest in clean-energy alternatives? We already have pollution-control laws that favor clean energy. Private firms have an incentive to invest in cost-effective energy alternatives. We do not need more failed tax-funded alternative energy projects, like Solyndra, which went bankrupt after costing taxpayers more than $500 million. Isn’t natural gas a clean-energy alternative? Then why should it be taxed to pay for other kinds of energy that are so expensive that few would use them without government subsidies.

Didn’t the legislature just enact a big increase in gasoline taxes and auto-registration fees to pay for investing in infrastructure? With fuel taxes, users of highways pay for construction and maintenance of highways. One argument for using severance-tax revenue to invest in infrastructure is that equipment traveling to and from gas wells causes damage to roads. But energy companies already pay impact fees to cover the costs of repairing damage to roads caused by equipment and vehicles that service natural gas wells.

Does Pennsylvania need to spend more on education, given that average spending per pupil in this state is $14,900, which is $2,900 more than the national average? Charter schools, however, only spend 80 percent of what traditional schools spend per student. Research on the effect of school spending, such as a 2010 study by the 21st Century Partnership for STEM Education, finds either no – or a very weak – association between levels of education spending and student performance on standardized tests. Instead of spending more on education, allowing charter schools to expand and providing tax credits for families who would prefer to choose their children’s school instead of sending them to government schools could make it possible to reduce education spending while improving the quality of education in the state.

Rather than providing a source of revenue for maintaining or increasing other state spending, natural-gas drillers should pay for the harm and environmental impacts their activities generate. If the current impact fee on natural-gas producing wells does not provide enough funds to cover the costs associated with those wells, then the impact fee should be increased. But Wolf and other severance-tax proponents are not primarily concerned with covering the costs associated with natural-gas wells; instead they are looking for ways to raise revenue to fund services that the state already is spending too much on or to subsidize other questionable projects, like the development of alternative energy sources.

It might make sense to enact a tax on natural gas extraction if we could count on our elected officials to reduce other taxes, such as the corporate net income tax, or the state personal income tax. The state of Ohio is considering increasing its severance tax on natural gas to offset a reduction in the personal income tax in the state. Unfortunately, lobbyists for the status quo will likely make it difficult to cut other taxes as they insist that Pennsylvania legislators maintain or increase spending on their pet programs, whether schools, state parks and forests, alternative energy, or subsidized economic development projects. Thus it would be better not to enact a severance tax on natural gas in Pennsylvania.

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