Why do we need a natural gas severance tax?

Gas well in ANF

Courtesy Kirk Johnson

 

By Jessica Jacoby

Why do we need a natural gas severance tax?

Pennsylvania is home to one of the largest natural gas deposits in the country – the Marcellus Shale. This is a deep geological formation, which underlies 54 of the 67 counties of Pennsylvania and contains sufficient reserves to meet US demands for natural gas for 10 years. On account of new drilling techniques and rising natural gas prices, Pennsylvania is set to gain a lot from the extraction of natural gas. However, this development also poses many significant problems, which a natural gas severance tax will help to resolve.

What are the benefits of natural gas extraction in the Marcellus Shale?

Natural gas extraction in the Marcellus Shale will bring jobs, investment and money to Pennsylvania. This will bring significant growth to the economy and lower Pennsylvania’s dependence on fossil fuels from other parts of the country.

What are the drawbacks of natural gas extraction in the Marcellus Shale?

The drawbacks of natural gas extraction are both social and environmental. Natural gas extraction is a costly process, which will impose additional costs on state and local governments, as well as their taxpayers. Some examples of the costs which may arise are the building and maintenance of new infrastructure, emergency response and the demand for specialized water treatment facilities. In addition, the environmental costs of natural gas extraction are many and include surface erosion, water contamination, soil compaction, abandoned wells and fragmentation of wildlife habitat.

What other states impose a natural gas severance tax?

At time of writing, 35 states have adopted a severance tax on the resource extraction industry in order to help protect taxpayers from the environmental as well as social costs of mineral production. States that impose a natural gas severance tax include Texas, Arkansas and West Virginia.

How does the natural gas severance tax work?

Unlike the leasing money, which is based on the amount of acres of land under lease, and is paid at the beginning of the gas exploration process, the severance tax becomes active once the gas actually starts flowing from producing wells and will continue to be in force as long as gas is produced. In addition, the severance tax applies to the gas produced by each individual well, regardless of who owns the land and the revenue will be transferred to the Commonwealth to be reinvested later.

How much tax revenue will be raised by a natural gas severance tax?

Based on the natural gas deposits of Marcellus Shale and the rising price of natural gas, the severance tax is projected to initially raise more than $100 million a year, rising to more than $630 annually by 2014.

How will the revenue generated from a natural gas severance tax be used?

The Sierra Club proposes that some of the revenue should be used to offset the environmental and social costs imposed by natural gas extraction. It suggests that a portion of the tax be directed to the Environmental Stewardship Fund (Growing Greener), Pennsylvania’s natural resource commissions, as well as to local governments which will be impacted by natural gas drilling operations.

Will the natural gas severance tax discourage companies from coming to Pennsylvania?

No, this kind of severance tax has been adopted by 35 other states and has shown to have little impact on natural gas production or commodity prices and has not negatively influenced industry. Natural gas producers pay this kind of tax in other states and continue to operate there.

 

Jessica Jacoby serves as PA Chapter Student Intern.

Published August 2009