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Marcellus Severance Tax, Done Right

Updated: Feb 26

On Feb. 8, State Rep. Greg Vitali and supportive lawmakers proposed legislation that would enact a severance tax on natural gas drilling.  They pointed to The Pennsylvania Budget and Policy Center’s “Severance Tax Ticker” which today shows that the delay in enacting a severance tax has cost Pennsylvania over $149,000.  

GASP supports the enactment of a severance tax on natural gas in Pennsylvania, and hopes we can soon drop the stigma of being the only state not to levy a severance or extraction tax on this industry.

So, what is a severance tax, anyway?

The Pennsylvania Budget and Policy Center’s recent report, “Responsible Growth: Protecting the Public Interest with a Natural Severance Tax,” is an in-depth look at the issue.  The report explains that a severance tax is a method for internalizing the external costs of natural gas drilling not currently paid by the natural gas producers. 

Without this tax, the burden of covering these external costs is given to state and local taxpayers. 

For example, Pennsylvania has no severance tax on coal extraction and as a result has suffered from many negative environmental impacts from the coal industry, such as acid mine drainage. 

Taxpayers now have to pay to try to fix these problems, not the industry that produced them. 

A recent article points out that highly polluting industries are so successful because the cost of these externalities are not reflected in prices.  If we continue to make the prices of these externalities hidden, consumers will not know the full costs of the natural gas industry, and thus cannot make informed decisions.

Currently, we are the only state that has high production of fossil fuels that has not enacted a severance tax on natural gas extraction. Of the 35 states that do collect a severance tax, they received a total of $16.7 billion in severance tax revenue in 2007-2008. 

Much of this money goes to educational systems and environmental clean-up programs. Pennsylvania’s gas industry is growing very rapidly.  While an expanding industry is great for those being employed by it, most of Pennsylvania’s natural gas industry does not pay corporate net income taxes or property taxes, let alone a severance tax.

It’s a serious problem, and we desperately need a severance tax to protect Pennsylvania citizens from the burden of this industry’s externalities.

What are some of these externalities?

Surface erosion, contamination of water, soil compaction, and abandoned wells are among some of the main concerns. Erosion and subsequent silting is caused by construction processes before, during, and after the wells have been drilled. Water supplies can be contaminated through failures of cement well casings, surface spills, or improper wastewater disposal.

The water that returns to the surface after drilling contains radioactive isotopes, such as radium-226. There is also a lack of decontamination sites to handle this water.  Finally, the wells that are abandoned must be capped, and the state is often held responsible for this burden.

As of 2009, the Growing Greener fund has used up $9.3 million to cap abandoned wells.

Through this summary, one can see that lacking a severance tax will put a heavy burden on Pennsylvanians, especially future generations who more than likely will have nothing to do with hydraulic fracturing.

How do we ensure this severance tax will be fair to Pennsylvanians?

The Pennsylvania Budget and Policy Center produced an article that explains how to make a severance tax fair to Pennsylvanians and to the gas industry. Their recommendations include:

  1. Set a reasonable tax rate, one that is fair but still competitive.  Our rate should account for factors such as our proximity to gas markets.

  2. Do not allow loopholes in the tax, such as deducting costs for transportation and production, or tax breaks during the early, very productive years of production.

  3. Do not exempt low-producing wells from a severance tax, which could make only one third of natural gas produced by wells subject to the severance tax.

  4. Further recommendations include allowing local governments to collect property taxes on oil and gas, developing a specific plan for where tax revenues will be allocated, and requiring the gas industry to keep their production open to the public.

Our citizens should not be held responsible for externalities associated with natural gas drilling. It is unjust to put such an immense burden on so many that have nothing to do with the natural gas industry. GASP supports a severance tax that takes these recommendations into account, and is working with partners to make this a reality.

Guest written by Claire Thomas, Chatham University student and GASP Intern

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