Is Wolf’s plan for a severance tax dead?
During his successful campaign for governor in 2014, Tom Wolf vowed he would impose a severance tax on the natural gas industry that was booming across Pennsylvania at that point, and the revenue would be used to support the commonwealth’s public schools.
Two years later, the possibility of a severance tax being levied in Pennsylvania seems all but dead.
In a budget address earlier this year, Wolf proposed a 6.5 percent tax on natural gas drillers, but it was nowhere to be found once the state’s 2016-17 budget was approved last month. Instead, gaps in the budget were filled by new taxes on downloads of movies and music, an additional $1 tax on cigarettes and optimistic projections about revenue that will come from online gaming, even though it has not yet been approved and faces significant opposition that could well derail it.
During his first year as governor, Wolf also proposed a 5 percent severance tax, and it was one of many sticking points during the protracted budget standoff. Perhaps chastened by the General Assembly’s refusal to move on it last year, or hoping to avoid yet another prolonged stalemate, Wolf never seemed to put up much of a fight when it came to a severance tax.
Moreover, Wolf and his allies in the state House and Senate might not have been willing to expend much capital on it because, at least right now, a severance tax wouldn’t yield nearly as much revenue as it might have even two years ago thanks to the steep downturn in the natural gas industry.
When Wolf first proposed a severance tax, he said a 5 percent levy on Marcellus Shale production would bring $1 billion to Pennsylvania’s coffers. To understand how precipitous the dip in the natural gas industry has been, a proposed 6.5 percent tax this year would have brought only a projected $217.8 million. That’s about what the state has taken in a annually in impact-fee money that is disbursed to communities where drilling has taken place.
While consumers have undeniably been benefitting from lower oil and natural gas prices thanks to a worldwide glut of both commodities, state budgets haven’t fared nearly as well. Lawmakers in North Dakota, Oklahoma, Alaska and West Virginia have all had to wrestle with deficits, while Wyoming saw its severance tax revenues tumble by $160 million. Employment in the oil and gas industry has been hit hard. This plunge should serve as a reminder about the folly of placing all of your bets on the continued health of one industry, as the Pittsburgh learned following the collapse of the domestic steel industry.
Still, there is every likelihood that oil and natural gas will bounce back once inventories are depleted. When it does, Pennsylvania should revive the idea of a severance tax.
The impact fees that help local communities must stay in place. But that being said, every other state where the natural gas industry has set up shop has a severance tax, including Texas and West Virginia. The industry has not fled from these states, despite the perennial threats that natural gas drillers will leave Pennsylvania en masse if a severance tax should land on the books. And even if they did leave Pennsylvania, where would they go? To another state that has a severance tax.
The natural gas industry has been getting a sweetheart deal in Pennsylvania. When the outlook for the industry improves, it’s time for that deal to end.