Prospects or Non-Prospects of a Severance Tax

Thanks to the improvements in hydraulic fracturing technology and the ensuing “shale revolution,” Pennsylvania became the second-largest natural gas producer in the United States. Sitting atop the most prolific natural gas play in the country, the state has benefited economically from the extraction and use of the newly accessible fossil fuels. But shale extraction has also brought serious public health and environmental concerns.  As the only major drilling state without a severance tax, the question remains whether or not a severance tax will pass the state legislature.

There is really no political will to introduce severance tax in Pennsylvania, and the gubernatorial and today’s legislative elections are unlikely to change the calculus of which side of the political spectrum succeeds. State lawmakers have not been able to rectify the situation, as they’ve tried and failed to pass a severance tax 66 times.  Moreover, even the failed efforts that have been undertaken have not been enough.

For example, the most recently proposed tax, HB 1401, failed by one vote in the Pennsylvania Senate. The tax bill would have added a 3.2% severance tax on top of the impact fee, for a total of 5%—well below the average of 7% among oil and gas states. The bill also included a provision that would have approved all outstanding drilling permit requests after a period of 30-45 days, even if the request contained inaccurate information.

If a tax bill proposing a lower than average severance tax with additional provisions clearly in favor of the drillers is unable to pass the legislature, what chance does any future severance tax bill have?

Even with new elections, the prospects are not good. First, Pennsylvania is almost evenly divided between the increasingly polarized Democratic and Republican parties with the candidates of the latter energized by the tax-cutting agenda of the President. Governor Wolf’s opponent Scott Wagner is probably one of the best examples of the Trump-inspired Republicans. With Wolf’s constituency quite evenly divided, any strong move on the tax could mean political suicide. Not surprisingly, Wolf’s 2018-2019 budget passed without new or increased taxes on drilling, despite the Governor proposing a severance tax every year since taking office in 2015.

Second, since 2010, the natural gas industry has spent at least $46.6 million on lobbying and an additional $14.5 million on political donations, with the majority of those donations going to legislative leaders in control of energy bills and the heads of committees that regulate the industry itself. HB1401 was thwarted by the House Speaker and Majority Leader, both of whom have received campaign contributions of (respectively) nearly a quarter of a million dollars and over $100,000 from drilling companies, their political action committees, or trade groups. And during elections, campaign contributions are crucial, as many of the Pennsylvania races will potentially be a close call.

Historically, Republicans have dominated Pennsylvania’s congressional delegation, winning 13 of the state’s 18 congressional districts in 2012, 2014 and 2016. However, earlier this year the state Supreme Court ordered congressional district maps be redrawn, finding the old map in violation of the state constitution. With a newly drawn district map, Republican control over house seats are compromised as eight House districts are currently rated as “solid” or “likely” Democratic, while six are “solid Republican,” and another four seats are firmly in play, according to polls by Politico.

In general, the severance tax has eluded Pennsylvania so far. And it seems that this will continue to be the case as political tensions between Democrats and Republicans make any increase in taxes a politically dangerous move. Considering the political pattern thus far, it is likely another severance tax will be proposed by Governor Wolf, if he wins re-election, with its inception hanging on to the coming results of this year’s midterm elections.