PA Doesn’t Need an Extraction Tax

Member Group : Citizens Alliance of Pennsylvania

February 18, 2015:

Governor Wolf is off and running to increase taxes on the natural gas industry. He intends on using the money from an extraction tax to increase school funding. As our friends at the Commonwealth Foundation point out, state spending on public education is at an all-time high. Furthermore, Pennsylvania’s public school spending per pupil is more than the national average.

The real problem and one not addressed by Wolf is that less of the money going to schools is going toward education, and more of it is being consumed by chronically underfunded pensions. In 2008, taxpayers contributed roughly 4.8 percent of school employee payroll costs to the pension. Today that number is 25.8 percent. And, it will increase to 33 percent by 2035. Simply throwing more money at schools is not going improve education outcomes; it will go to teacher’s pensions.

Separately, the proponents of an extraction tax argue that Pennsylvania is the only state without one. As we have noted before, this is technically true. However, it ignores the fact that the Commonwealth has the second highest corporate net income tax in the country, 9.99 percent. Here are the corporate tax rates for the states with an extraction tax:

Arkansas 6.5%
North Dakota 4.53%
Ohio* 0%
Texas* 0%
West Virginia 6.5%
Wyoming 0%

*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.

Pennsylvania’s rate is substantially higher than all of them. Natural gas producers are already reducing drilling activity due to low natural gas prices. If Pennsylvania adds another cost to doing business here, there is nothing stopping drillers from cutting back further and darkening the one bright spot in Pennsylvania’s economy.

Governor Wolf and other extraction tax backers scoff at the idea of natural gas producers closing up shop. What they fail to recognize is there is nothing preventing drillers from moving their rigs to more hospitable states and plugging their higher cost Pennsylvania wells. A scenario like this playing out would further exacerbate Pennsylvania’s financial troubles. Where do you think Wolf would look next to raise money?

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.