A Severance Tax Would Be an Extra Tax on Marcellus Shale

     Proponents of a severance tax on natural gas drillers in the Marcellus Shale formation in Pennsylvania are implying that the gas drillers are not currently paying any state tax.  They claim, for example, that Governor Tom Corbett and the Republicans in the General Assembly would not tax the gas drillers.  However, their claim is false because the proposed severance tax would be in addition to the corporate taxes the drillers already pay, like all other Pennsylvania corporations.

     The severance tax proponents argue that because most other states in the American Union impose a severance tax, Pennsylvania should, too. However, they do not consider that the Commonwealth’s corporate income tax is among the highest in the United States and the world. Pennsylvania is unusual in that it taxes both income and assets (i.e. the Corporate Net Income Tax and the Capital Stock and Franchise Tax). The lack of a severance tax, therefore, helps to balance the high corporate taxes, thus making Pennsylvania attractive enough for gas drillers, who could take their rigs to more competitive states, to operate in the Keystone State.

     As I have noted in previous posts, severance tax proponents would kill the goose that laid the golden egg by imposing a severance tax in addition to Pennsylvania’s high corporate taxes. Natural gas drillers operating in the Marcellus formation not only pay corporate taxes to the Commonwealth, they employ tens of thousands of workers who, in turn, pay state and municipal income taxes. The drillers also pay royalties to landowners, thereby increasing the value of land, which, in turn, increases the amount of county, municipal and school real estate taxes paid. In addition, the drillers improve roads, which lessens the need for government to expend public money for that purpose.

     Environmental violations, which are usually cited as an excuse to impose a severance tax on Marcellus gas drillers, may be addressed by lawsuits or civil fines, as with any other industry.

     Indeed, proponents of a severance tax on top of the taxes corporations already pay would unfairly impose a special tax on one industry that no other industry pays.  In short, no one is proposing that gas drillers not be taxed, only that they not pay an additional tax.