Severance Tax Will Bring in Many Times the Revenue of Impact Fee

HARRISBURG, PA (Dec. 9, 2014) – A severance tax on natural gas, which every other major gas-producing state already has in place, will generate significantly more revenue for Pennsylvania than the current impact fee, even at lower gas prices.

In 2015-16, a 5% severance tax would yield $675 million at a natural gas price of $2.67 per thousand cubic feet (MCF) – two-and-a-half times the estimated impact fee of $270 million.  Assuming a middling estimate of $3.48 per MCF, an estimate derived from the U.S. Energy Information Administration price forecast discounted for Pennsylvania’s lower gas prices, it would raise $881 million, more than three times the estimated impact fee.

Pennsylvania faces a budget shortfall of $2 billion for 2014-15, a shortfall that could have been reduced considerably if the General Assembly had enacted a severance tax earlier this year, when the depth of the projected shortfall was already known. Public support for a severance tax has been demonstrated in numerous polls throughout the fall, and was a key part of Governor-elect Wolf’s campaign platform.

The Marcellus Shale Coalition, speaking on behalf of the natural gas industry, has raised the point that short-term prices for natural gas at some hubs distributing Pennsylvania natural gas have fallen below the national benchmark price.

Even at lower prices, which are expected to reverse once planned pipelines come on line, the severance tax will raise many times more than the impact fee. A 5% severance tax will raise $1 billion annually, if not in 2015-16, then soon after.

Of greater concern than the price of natural gas are “accounting measures” gas companies will seek to have written into the law that will significantly reduce severance tax revenue. The process is similar to that which is already familiar to Pennsylvania royalty owners who have seen their royalty checks greatly diminished because of deductions in the fine print.

But the industry’s focus on future gas price estimates masks the real issue.

As PBPC Research Director Michael Wood has noted, “Whether the tax would bring in $1 billion or $800 million at a specific point isn’t the real question. The real question is whether a severance tax would be a better deal for Pennsylvania or not. The answer is yes.”

A severance tax is based on both the amount of gas produced and the price of the gas.  Even at lower gas prices, the tax would still raise significantly more revenue than Pennsylvania’s current impact fee, which is based on number of wells drilled each year and the price of natural gas. The impact fee generated an estimated $224 million in 2013-14. The estimate in Monday’s Associated Press story of what a 5% severance tax would bring in at current gas prices -- $675 million – is more than three times that amount, and would make a significant dent in the state’s $2 billion budget shortfall next year.

Impact Fee versus Severance Tax

Feature

Impact Fee

Severance Tax

Tax or fee base

Number of “unconventional” wells drilled

Economic value of natural gas produced

Paid

Each April, based on prior year

Monthly

Estimate 2013-14

$224 million

$711 million

Estimate 2015-16

$270 million

$881 million

Number of gas-producing states using

One of 32 (PA)

27 of 32, including nine of the top ten producing states

For more information on the severance tax click here.