Pushing a New Drilling Tax, When Gas Prices Are Low

  • A Marcellus shale well pad in Butler County, Pa. Photo: Reid Frazier

February 27, 2015

Pennsylvania Governor Tom Wolf has been traversing the state, pitching his proposal to tax the oil and gas industry, and put the money toward education. Other energy producing states already charge a similar severance tax to the one Wolf wants in Pennsylvania. But some say the timing is wrong. With gas and oil at rock bottom prices, they say a new tax now could drive the industry elsewhere.

Governor Wolf says there’s a solution to Pennsylvania’s underfunded schools, and it’s beneath the ground.

“We sit on top of one of the richest deposits of natural gas in the world. We have the natural resources to actually do something about the problem here.”

Wolf proposes a 5 percent severance tax on value of gas produced. He’s also pushing an additional flat fee based on the volume, as a hedge for market swings.

The package would raise a billion dollars for Pennsylvania in the first year.

“Well there’s no doubt. If you add yet an additional tax in this kind of pricing environment, it’s a recipe for disaster,” said Stephanie Wissman, Director of the American Petroleum Institute’s Pennsylvania division. She says Pennsylvania already charges an impact fee, a flat annual price on each well. And the state has one of the highest corporate net income tax rates in the nation, though Wolf is proposing to slash that.

Wissman says now, with gas prices significantly down, drillers aren’t making as much profit, and they can’t afford a new tax.

“Margins are thin as they are, but if you add yet another cost of doing business, then I have no doubt you’ll see a slowdown.”

Another industry trade group says a severance tax could threaten other investments, like a new multi-billion ethane cracker being considered in Beaver County.

Some say drillers already cutting back.

Servers bustle around with large trays of sandwiches at Hot Rods House of Barbecue in Waynesburg, in southwest Pennsylvania.  Owner Rodney Phillips says most of their customers work for energy companies with wells in the area, “We wouldn’t be here without the oil and gas industry.”

But Phillips says business is down 20 to 30 percent since last summer.

“I’ve seen them let guys go home at noon. I’ve never seen that. Usually, it’s just the opposite, ‘Dudes, we’re working 16 hours a day, seven days a week, we’re rolling steady.’"

Phillips says the industry slowing down, "There’s no money in it right now.”

But what looks like a slowdown to workers, actually may be the mark of industry improvements. That’s according to Parth Vaishnaw, a graduate researcher in Economics and Public Policy at Carnegie Mellon University in Pittsburgh.

“The industry has responded to the low prices not by running away, not by stopping, but by innovating and by becoming more efficient, and producing gas more cheaply.”

Vaishnaw and his team analyzed the impact of a severance tax in Pennsylvania, and found at the rates proposed by Governor Wolf, the industry is still profitable.

But Washington County Commissioner Larry Maggi still worries. He says the oil and gas industry has been a godsend for their economy. But with profit margins already slim, a new tax could push the industry away.

“You know, we’re right next to the border here, we’re next to Ohio and West Virginia, and if there’s too much of an onerous tax put on the oil and gas industry, they’re going to move, in some cases only five or six miles west, it’s not very far where some of them have to move.”

But Governor Wolf points out that every other energy producing state already levies a severance tax, his is modeled on West Virginia’s tax. And in Ohio, Republican Governor John Kasich is pushing for an even higher severance tax than Wolf.

Photo: Pennsylvania Governor Tom Wolf proposes a 5 percent severance tax on natural gas drilling at Caln Elementary School in Thorndale, Chester County. Credit: StateImpact Pennsylvania. Thanks to Katie Colaneri for audio clip of Governor Wolf.

Photo: Rodney Phillips, owner of Hot Rods House of Barbecue in Waynesburg, PA. Credit: Julie Grant.