Pennsylvania Severance Tax in Trouble

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Pennsylvania is the largest natural gas producing state that does not impose a severance tax on the removal of nonrenewable resources. Such a tax can be an important revenue source, particularly considering the current economic situation. It can also be a means to compensate residents and fund the societal costs associated with extracting a public (and environmentally damaging) resource.

As part of Pennsylvania’s final budget deal in July, state legislators agreed to work out details for a new severance tax on natural gas extracted from the Marcellus Shale reserves by October 1st.  Not surprisingly, with the deadline just a few weeks away, lobbyists led by the industry-backed Marcellus Shale Coalition have descended on Harrisburg to kill or at least weaken the proposed tax.  Governor Ed Rendell has lost all confidence that an agreement will be reached by the deadline and has threatened to veto any plan that does not come close to his preferred structure for the new tax.

The Governor supports a tax modeled on one in neighboring West Virginia, which imposes a 5 percent tax on the value of extracted gas and an additional levy of 4.7 cents per one thousand cubic feet.  A recent report from the Pennsylvania Budget and Policy Center supports adopting the West Virginia model.  According to the report, if Pennsylvania followed the West Virginia approach, the state would raise an estimated $71 million (revenue Governor Rendell is counting on to close a $282 million budget gap for fiscal year 2010-2011) and as much as $400 million by 2014-2015.

Industry supporters want the tax to start at 1.5 percent of the value of the extracted gas for the first three years of the well’s operation and increased to 5 percent only in the following years.  Governor Rendell says that "about 50 percent of all the natural gas is pumped out during the first five years" of a well's producing life and calls the proposal “ridiculous.” 

Only time will tell if policy will trump politics in the Keystone State.

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