A look at what a Severance Tax could mean for PA

This past year the Impact Fees, which were enacted starting in 2012, generated $225 million in revenue to be used in counties impacted by the oil and gas industry as well as state-wide environmental improvement. A much-discussed alternative is a Severance Tax which we will look at in depth over the next week.

The Current Act 13 Impact Fees

Part of legislation called Act 13 are Impact Fees that are placed on the oil and gas industry which have been in place since 2011. Under Act 13, all new unconventional oil and gas wells drilled in Pennsylvania are subject to this rule. Once a well is drilled, the clock starts on the payments which must be paid annual by the producer for 15 years.

The amount varies from year to year based on several things, such as the price of natural gas. In 2013, producers paid $50,000 for each new horizontal well and $10,000 for vertical wells.

The fees are all due annually by April 1 and to date Impact Fees have resulted in $630 million collected from producers. The funds are distributed as outlined in our post last week with the majority of the funds going to the areas with the largest number of oil and natural gas wells.

Proposed Severance Tax

Right now there are multiple forms of a Severance Tax being discussed in Harrisburg. Rather than get into the nitty gritty details, we’ll take a look at the overall idea of the tax.

Where the current Impact Fee collects payment for each drilled (or spudded) well which is paid annually by producers, the Severance Tax approach is different. A Severance Tax would instead create a tax on the production of oil and natural gas in Pennsylvania and collect for as long as that well is producing.

Instead of having a lump-sum paid within the first 15 years of a producing well, this would be a percentage amount that will be levied on the producers. One notable difference is how the funds would be paid. In states that have a Severance Tax currently on oil and gas production, the Severance Tax isn’t paid strictly by the producers but instead is paid by the royalty owners as well.

It’s more than a Tax vs. Fee issue

One of the recurrent reasons for why Pennsylvania needs a Severance Tax rather than an Impact Fee is that all other states have one. First, not EVERY state has one. Ohio, for example, does not require producers to pay anything for oil and gas wells drilled in state. One of the great things about this country is that the states are able to determine legislation that best fits their needs as this country is so vast and diverse.

But let’s play with the “we want one, too” mentality by taking a look at West Virginia for a moment. For example, Pennsylvania is also the only state with an impact fee and boasts the second highest income tax in the country at 9.9%.

Below is a comparison of Pennsylvania energy taxes verse West Virginia, who currently has a 5 percent severance tax but do not have a program comparable to Act 13.

Severance Tax

Laying out the facts

Over the next few days we will continue to lay out the facts of the Impact Fee, proposed Severance Tax and what they both mean for Pennsylvania. We encourage you to submit questions and comments for us to address as we walk through the ripple effect that taxes and fees have on the state, its residents, and the oil and gas industry’s future employees.

Video Tuesday: Where does PA Impact Fee money go?
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George Stark

George grew up in Western PA, graduated from Dickinson College and has been involved in Public Policy matters since then. He has worked in Harrisburg and Pittsburgh on energy issues with a focus on Local, State and Federal matters. As the Director, External Affairs at Cabot Oil & Gas Corp, George directs the media, community and legislative relations for the company.

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