In 2012, Pennsylvania enacted an “impact fee” on natural gas wells drilled into Pennsylvania’s Marcellus Shale that generates a relatively small amount of revenue from the expanding gas industry. Replacing Pennsylvania’s impact fee with a modest 4% severance tax could generate $1.2 billion annually by 2019-20, three times that of the current fee.
Using a “moderate” production scenario — 1,400 new wells per year going forward and gas prices as most recently forecasted by the U.S. Energy Information Administration (EIA) — the Pennsylvania impact fee brings in less revenue than a severance tax comparable to that of Texas or West Virginia. As production increases over time, the gap grows larger between the revenue generated at the West Virginia or Texas tax rates and from Pennsylvania’s impact fee.
The effective rates of the Texas and West Virginia severance taxes were calculated using the value of all natural gas produced in those states and the total natural gas taxes that were collected. The Texas shale gas tax rate is an estimate of what a typical shale gas well would pay in its first 10 years of operation, taking into account that state’s high-cost tax exemption.
If Pennsylvania adopted the effective rate of West Virginia’s severance tax — the middle rate of the three analyzed in this piece — the commonwealth could generate by 2019-20 nearly $1 billion more per year than it is likely to generate with the current impact fee. Every year, Pennsylvania is leaving hundreds of millions of dollars on the table that would be collected in other, more conservative states that use those funds to help pay for schools, infrastructure, and health care.
Even assuming lower levels of future drilling — 1,100 new wells per year — and low future natural gas prices — $3 per thousand cubic feet (MCF) — impact fee revenue would grow more slowly than Texas- or West Virginia-type taxes on the same level of gas production.
Even with Fewer Wells and Low Gas Prices, PA's Impact Fee Generates Less Revenue Than Texas' or West Virginia's Severance Tax RateIt is important to note that drilling companies also pay local taxes, including property taxes on the production value of gas, in West Virginia, Texas, and many other mineral-rich states. A 2002 state court decision exempted oil and gas reserves from local property taxes in Pennsylvania, leaving municipalities and school districts with little ability to recover the cost of drilling-related impacts.
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