Way No. 6: A Severance Tax

Wolf budget severance tax would raise $1 billion

Gov. Wolf’s proposed severance tax would provide stable funding for education and help eliminate the structural deficit.

Gov. Wolf has proposed a severance tax on the extraction of natural gas in Pennsylvania to provide funding for public schools, economic development and oversight of the gas drilling industry. In the first full year of collections, it would generate about $1 billion in revenue. Pennsylvania is the only major gas-producing state without a severance tax. The governor’s proposed tax is almost identical to the tax in place in neighboring West Virginia.

Under Gov. Wolf’s proposal, most of the revenue would be used to increase the state share of public school funding by $2 billion over four years. This stable, recurring source of revenue would also help eliminate the commonwealth’s structural deficit, which has led Wall Street to downgrade Pennsylvania’s credit rating five times over the last three years.

If legislative leaders would allow a vote on a severance tax, it would likely pass. Lawmakers in both parties have introduced severance tax bills every year since 2009, and every year gas drillers have successfully fought the tax, spending $46.8 million on lobbying and $8.2 million on campaign contributions since 2007.

Despite industry claims, the drillers would not leave Pennsylvania if the General Assembly passes a reasonable severance tax like the one the governor proposes because all the other major gas-producing states have severance taxes. Here, the drillers often pay little to no corporate income taxes. In fact, they pay less now in state income taxes than they did in 2008 at the beginning of the gas boom. If drillers increase prices to pass on the cost of a severance tax to consumers, most of that price increase would be paid by out-of-state consumers as 90 percent of Pennsylvania gas is exported to other states.

The governor’s proposed tax is fair and reasonable. It would have an effective rate that is lower than or equal to that of other major gas-producing states (e.g., lower than in Wyoming and New Mexico and roughly equal to the rate in Texas). As natural gas prices rise, Pennsylvania’s effective rate would drop.

As Republican state Rep. Gene DiGirolamo wrote on Pennlive.com: “A severance tax is smart public policy, fair to the industry, makes substantial investments in our citizens and natural resources, and can attract the support of Gov. Tom Wolf, Republican legislative leaders, and both Democratic and Republican members of the General Assembly.”

A severance tax is a crucial key to unlocking the budget impasse.

Return to Why the Budget Matters: Let's Count the Ways.