Each state creates their own tax structure and budget based on their unique demographics and economies. Yes, Pennsylvania is the largest natural gas producing state without a severance tax, BUT Pennsylvania is also the only state with an impact fee raising $225 million and is home to the second highest income tax rate in the nation. Comparing Pennsylvania’s tax rates to those of other states is not so black and white.
However, in the case of the proposed severance tax for Pennsylvania it is important to look at how other states tax oil and gas companies.
An important note about the severance tax in West Virginia is that it’s a five percent severance tax imposed on the natural gas industry as well as oil, coal, limestone/sandstone, sand, gravel, and other natural resources. Pennsylvania does not impose a severance tax on any of these industries. Also, West Virginia’s income tax is 6.5 percent while Pennsylvania taxes at a 9.9 percent rate.
Unlike the proposed severance tax for Pennsylvania, in West Virginia the revenue generated by the severance tax on oil and gas is placed in a fund established by the State Treasurer’s Office. That fund is then distributed much like Pennsylvania’s impact fees. 75 percent is distributed to oil and gas producing counties while the other 25 percent is spread across all counties based on population.
A five percent rate on just the oil and gas industry in Pennsylvania along with the 9.9 percent income tax could have a dramatic effect on the Pennsylvania economy and job market. Unlike West Virginia the proposed severance tax for Pennsylvania would only be applied to the oil and gas industry. Not to mention the revenue that it could generate would become part of state budget instead of being directly returned to the counties who are home to the oil and gas industry.
Like the proposed Pennsylvania severance tax, West Virginia’s tax is an extraction tax, meaning that the gas is taxed when it is extracted and before it is sold, or “profitable.” In Texas however, they have a higher severance tax rate at 7.5 percent that is placed on all gas extracted from a well once that well has become profitable. Meaning, that oil and gas extracted in Texas is not taxable until the oil and gas from any one well brings in enough revenue to cover the cost of that well. In Texas, oil and gas companies are not taxed until they break even on their well.
While a 7.5 percent tax might seem high, and thus highly profitable for the state, when you compare the overall tax rates of Pennsylvania to other states, the proposed severance tax is still higher than Texas. This is due to Pennsylvania’s high income tax rate of 9.9 percent compared to Texas who does not have a corporate income tax that oil and gas companies must pay like they do in Pennsylvania.
Just recently the Ohio House of Representatives voted in favor of a proposed increase to the state severance tax on oil and gas from a low rate of less than 1 percent to a modest 2.5 percent. Similar to West Virginia and the impact fees in Pennsylvania, the Ohio bill currently stipulates where the revenue from their severance tax will go. A portion goes to the Department of Natural Resources and 17.5 percent is allocated to benefit local governments. However, a big difference in Ohio is that the largest portion of the revenue goes back to the state to help fund income tax relief.
Ohio’s proposed 2.5 percent severance tax is still less than the proposed 5 percent in Pennsylvania, making Ohio a more profitable option for oil and gas companies if the Pennsylvania severance tax were to be voted into law. Over the last few years oil and gas operations have been declining slightly in Pennsylvania due to market prices of natural gas and the competitive nature of the industry. However, in Ohio operations have been steadily increasing.
Without a severance tax Pennsylvania is towards the top for state collections already. Part of the high ranking has to do with population size. However, Ohio is only nine percent smaller in terms of population size but has 24 percent less tax revenue even with a 2.5 percent severance tax.