April 30, 2014:
One thing all the Democratic candidates for Governor and some Republicans in the general assembly agree is on is that Pennsylvania needs a severance (or extraction) tax on natural gas. They are wrong, but it is something they agree on as policy.
The frequent refrain from proponents of an additional severance tax is "every other state has a severance tax, so Pennsylvania should too." What proponents of an extraction tax conveniently ignore is the overall tax environment of those states versus Pennsylvania.
The biggest component of the tax environment for corporations is, not surprisingly, the corporate tax rate. Pennsylvania’s 9.99 percent corporate income tax is the second highest corporate tax rate in the United States.
How does that compare to other states that also have an extraction tax?
North Dakota 4.53%
West Virginia 6.5%
*Note: Ohio and Texas have a gross receipts tax, which is not directly comparable to a corporate income tax. All data via the Tax Foundation.
You can see the Commonwealth’s corporate tax rate is not just a little higher than the others, it is substantially higher.
Pennsylvania’s overall tax policy is so bad that it ranked behind almost all of the states in the US, and Canada in a 2013 survey of oil company executives conducted by the Faser Institute (see page 88). The purpose of the survey was to look at the barriers to investment that oil and gas companies experienced around the globe. Overall Pennsylvania ranks in the "second quintile" in terms of attractiveness for development of oil and gas. Would we maintain that position if an extraction tax were added to the equation?
While the gas companies could not take the gas from the Marcellus shale with them if they left they state, they could plug the wells that they have drilled and mothball future projects. According to a project of National Public Radio, the PA Department of Revenue collected approximately $2 billion in taxes between 2007 and 2013 from corporate and individual taxes attributable to oil and gas.
How much of that revenue will go away if oil and gas companies take their business elsewhere?
Democrats and Republicans would impose a severance tax just to keep the leviathan of big government satiated. It would quickly reduce the number of high quality non-government jobs available in rural Pennsylvania. An extraction tax would take the wind out of the sails of the one sector of Pennsylvania’s economy that has been growing and that is bad policy regardless of political party.
Citizens Alliance of Pennsylvania (CAP) is a non-profit organization founded to raise the standard of living of all Pennsylvanians by restoring limited government, economic freedom, and personal responsibility. By empowering the Commonwealth’s employers and taxpayers to break state government’s "Iron Triangle" of career politicians, bureaucrats, and Big Government lobbyists, this restoration will occur and Pennsylvania will prosper.