Top 5 Facts about Drilling and Taxes in Pennsylvania

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Pa. Leaves Money on the Table by not Enacting a Natural Gas Severance Tax

Drilling Rig
This post was originally published at the Third and State Blog

By Jan Jarrett
Pennsylvania Budget and Policy Center

Gov. Tom Wolf has proposed a severance tax on the extraction of natural gas in Pennsylvania to provide funding for public schools. Lawmakers in both parties have introduced severance tax bills every year since 2009, and every year the gas drillers have successfully fought the tax, spending $46.8 million on lobbying since 2007.  Much of the industry’s lobbying money has gone into manufacturing a narrative, built on a foundation of myths, about the economic benefits of drilling and the fragility of the industry.

Below are five facts, supported by research and independent data, which tell the real story:

1.     Fact - Oil and gas development companies often pay little to no corporate income tax in Pennsylvania due to federal energy development tax incentives.  Gas drillers pay less now in state income taxes than they did in 2008 at the beginning of the boom. And even as production soars, the drillers are paying slightly less in impact fees.

  • Range Resources, the No. 3 PA producer, says it is “currently not in a taxpaying-position for federal income taxes,” and admits “we generally do not pay significant state income taxes.” 
  • Cabot Oil and Gas, the No. 2 PA producer, reports it paid no state income taxes in 2014.
  • Chesapeake Energy, the No. 1 PA producer, paid a combined federal and state effective income tax rate of only 1.5% in 2014.
  • Combined, these three companies reported more than $4 billion in net income in 2014.

2.     Fact – Every other major gas-producing state has a severance tax, so there would be no point to a drilling company “leaving” Pennsylvania because a severance tax is enacted here. State tax policies make little difference in the development of resources in one state over another. Montana offered tax rates of about half that of neighboring North Dakota, yet from 2009 to 2012 production doubled in North Dakota and fell in Montana by 14%. Tax policy aside, Pennsylvania’s Marcellus/Utica shale play is the largest, lowest-cost gas producing region in the country so it is very attractive to drillers.

3.     Fact – Most of the gas produced in Pennsylvania is exported to other states so, according to the Energy Information Agency, residents of those states would pay 90% of a Pennsylvania severance tax. Pennsylvania consumers already pay severance taxes to other states that ship gas here. Because severance taxes levied in other states are already figured into the price of gas, any increase from a Pennsylvania tax would be very small – less than 2%. Natural gas prices have fallen in Pennsylvania by 28% since 2008.

4.     Fact  Pennsylvania’s proposed severance tax has an effective rate that is lower than or equal to that of other major gas-producing states. When gas prices are at $2.50 per 1,000 cubic feet of natural gas (McF) or more –  and the Energy Information Agency projects gas will average $3.05 per McF in 2015 – Pennsylvania’s tax would have a lower effective rate than in Wyoming and New Mexico, and would be roughly equal to the rate in Texas. As natural gas prices rise, the effective rate would drop.

5.     Fact – The drilling industry inflated the number of jobs it created in Pennsylvania. The state Department of Labor and Industry recently improved the method for calculating the total number of drilling jobs, revising the figure downward. L&I now puts the net new number of jobs created by shale development at 59,394 jobs, with only about 23,478 of them directly related to the industry. Altogether, by this estimate, shale drilling accounts for 1% of all Pennsylvania jobs.