Pennsylvania Moves to Tax Natural Gas Extraction

Pennsylvania seems poised to levy a severance tax on natural gas extraction after new Governor Tom Wolf proposed a change in the state’s treatment of gas production that could produce as much as $1 billion a year in revenue.

The proposal would levy a 5% tax on the value of the gas at the wellhead, as well as charging producers 4.7 cents/Mcf of volume. The approach is essentially the same as that used in neighboring West Virginia.

The tax would replace the state’s existing impact fee, which has raised about $630 million since its inception in 2012. Wolf, who had promised to enact a severance tax during his campaign last fall, said most of the revenues from the new tax would be directed toward education.

Pennsylvania is currently the nation’s second largest producer of natural gas after Texas, but it is the only state with a significant natural resources extraction industry that lacks a severance tax. Texas currently taxes natural gas at 7.5% of market value.

The proposal faces an uncertain reception in the Republican-dominated state legislature. Still, observers expect that some sort of severance tax is likely to emerge eventually given that state lawmakers are already considering several other such proposals from representatives of both parties, and because the state is currently facing a $1.9 billion budget deficit. GOP leaders in the legislature have declined to rule out such a tax, though they have suggested they may tie it to other tax reforms.

New York’s recent ban on fracking is also thought to have improved the chances of a severance tax in that it effectively placed a large portion of the Marcellus Shale off-limits to drilling, thus reducing concerns that a new tax in Pennsylvania might send producers elsewhere.

—Thomas W. Overton, JD is a POWER associate editor (@thomas_overton, @POWERmagazine).