Tom Shepstone
Shepstone Management Company, Inc.

Proposals to impose a Pennsylvania severance tax on natural gas production are nothing more than a “rob Peter to pay Paul” stunt that will destroy the state’s competitiveness.

George Bernard Shaw famously wrote “A government that robs Peter to pay Paul can always depend on the support of Paul.” There are several Pennsylvania politicians of both stripes who live with districts having a lot of folks called Paul and none called Peter who are pounding the table with the message they’re prepared to rob anyone named Peter to pay those voters.  It’s about as superficial as it gets, yet the level of rhetoric seems to be escalating; politics as usual. Sadly, though, you can really blame the politicos if we the people are stupid enough to fall for it.

We’ve written about the proposed Pennsylvania severance tax here already; once to explain why gas companies doing business in the Commonwealth already pay more than they would in Texas, and, again, to observe how a Pennsylvania severance tax would rob gas region landowners, schools and communities to transfer money to place like Philadelphia. There’s still more to the story, though, and it has to do the competitiveness of Pennsylvania in attracting growth and revitalizing its rural areas, its manufacturing and, yes, even Philadelphia. We need a policy based on these goals, not one focused on robbing Peter to pay Paul.

A few facts are in order. They’re readily available from official sources such as the Census Bureau and include this State Government Tax Collections Summary Report: 2012, the County Business Patterns data and the Bureau of Economic Analysis data on gross domestic product by state. Combining the data sources and, in Pennsylvania’s case adding in the Act 13 impact fees, tells us where Pennsylvania stands with respect to other oil and gas producing states and illustrates why a Pennsylvania severance tax would take past the tipping point where the Commonwealth is still competitive enough to attract the more than $2 billion of tax revenue it’s already collected from the Marcellus Shale boom.

Here is the data for selected oil and gas states with whom Pennsylvania competes for business. It comes from Table A-1 of the report on state tax collections:

Notice Pennsylvania is near the top in terms of state tax collections already. Much of that is due to its size, of course, but it’s still 24% above Ohio, which is only 9% smaller. Ohio is more attractive from the standpoint of the total state tax burden. If we look at on a per capita basis, we get still more insight:

Pennsylvania’s total state tax burden per capita is already $221 or 15% higher than the average of its competitor states. A Pennsylvania severance tax geared to raise somewhere in the middle of the range of political campaign proposals 5-10% would raise roughly $975 million (before considering reductions from corporate income taxes that would obviously result) and that would put the Commonwealth at $1,777 per capita, moving it to third highest on the list. That’s not the proper direction to go when you’re already well above average.

Let’s look at some other measures:

No matter the measure, Pennsylvania already has an above average tax burden compared to the states with which it competes. It matters and those who are rushing to rob Peter are making a lot of uninformed and, frankly, stupid statements that are intellectual dishonest at the core. Consider this appeal by the Green Space Alliance, which continues to be unhappy Pennsylvania is not adequately funding Growing Greener and other pet slush funds they use to attack any and all development, even after Act 13 impact fees. They want the gas industry and landowners to pay for attacks on their own rights. Here’s some of their justification for a Pennsyvania severance tax (emphasis added):

Thirty-nine states tax the extraction of natural gas or other fuels and minerals…Twenty states place at least three and as many as seven distinct severance taxes on resource extraction. States which use a severance tax enjoy major benefits:

• West Virginia will receive $335 million in severance taxes in 2009. According to WV Governor Manchin, WV’s natural gas severance tax (on the books since 1987) did not inhibit extraction. To the contrary, natural gas is being extracted at a record pace.
• Alaska derives almost 65% of its revenues from extraction taxes.
• Louisiana, New Mexico, North Dakota and Wyoming are enjoying budget surpluses, thanks to extraction taxes.

Currently Pennsylvania does not tax the extraction of natural gas (or coal, oil and stone)…Gas drillers claim that Pennsylvania shouldn’t adopt an extraction tax because they already pay the corporate net income tax. However, most states where they operate, including Texas and Oklahoma where many of them are based, have both. In West Virginia, oil and gas drillers pay a corporate net income tax, a 5% severance tax of gross receipts at the wellhead and 4.7 cents for every 1,000 cubic feet of gas produced. 

Well, not exactly. West Virginia is not drilling at a record pace and Texas has no corporate income tax. Notice, also, there is no attempt to actually determine how the Commonwealth would compare to West Virginia or Texas, as we have attempted to do. The same pattern appears in this smooth sounding PennLive editorial of March 31. The editors offer this (emphasis added):

…The gas industry has typically pushed back, saying that comparisons should look at all other taxes the industry pays in a state – including income, property and sales taxes. And that’s a fair point – one that the independent fiscal office’s study freely concedes. Those taxes vary so much, the study could not factor them into a numerical analysis.

But those other taxes would have to be a pretty heavy burden to make up for the gentle treatment Pennsylvania gives current gas production.

Defenders of the gas industry suggest it pays plenty of taxes in Pennsylvania, especially noting that the state’s tax rate on corporation income is quite high. However, they don’t mention how easy it is to avoid paying the full rate or to shift income to other more favorable tax “homes.” Companies that produce a lot of gas here and sell most of it in other states or overseas, for example, can save a bundle on their Pennsylvania income tax.

Some citizens might worry that a newly raised severance tax will be passed straight through to Pennsylvania customers, so that they would pay it, instead of the gas producers. But that’s not how the natural gas market works. 

For any Pennsylvania gas sold out of state — and a lot of it is — any part of the tax that hits consumers is paid by out-of-state users. And natural gas prices in state are shaped by overall supply and wholesale demand in big geographic markets where gas is sold. A severance tax levied in one state does not automatically show up in the wholesale price, or in the price at a customer’s gas meter.

So, Pennsylvania has room to make gas companies pay more of their fair share for carting off this non-renewable resource, without automatically causing them to flee to other states.

How much room? In today’s tight times, with the state struggling to find enough money to invest in schools and higher education, that’s the right question to be asking. Ten percent, as state treasurer Rob McCord suggests, is so much higher than Pennsylvania’s peers that it’s likely to drive away drilling business. The five percent rate suggested by others is much closer to the mark.

PennLive editors say no one can calculate the impact of income taxes but then says they know enough to know there’s not enough difference to make up what a Pennsylvania severance tax ought to produce. Apparently, their calculations are divined from God and need not be shared with the rest of us. They also just know gas companies are avoiding income taxes despite paying billions to the Commonwealth.

And, if you’re worried the cost may come back on you as a consumer; well, that’s just how the market works and the editors say be happy, don’t worry. They strongly suspect there is a free lunch, in fact, by getting customers elsewhere to foot the bill. There are a lot of folks called Peter on the other side of the river. Finally, they’ve done a secret back of the envelope calculation and determined 10% won’t work but 5% will. Ok, we’re good to go then, right?

Well, not exactly. If you look at Pennsylvania’s two closest competitors, Ohio and West Virginia, you’ll notice something interesting in their rig count trends. Check this out:

Now, drilling rig counts don’t tell the whole story. Marcellus Shale production is up dramatically due to efficiencies gained, even though some rigs left Pennsylvania for Ohio and its “wet gas” when prices went down in 2011. Still, the overall trend is clear; Pennsylvania rig counts are three times what they were in 2007. Ohio is also up more than double what it was. West Virginia is down for the same period.

Robbing to Peter to pay Paul is a poor strategy, no matter how much Paul may applaud it. West Virginia, relatively speaking, has the highest state tax burden of any oil and gas state examined. The Pennsylvania severance tax proposal would move us closer to West Virginia and stymie what we have. It’s foolish. Robbing Peter never works.