The Only Oil-and-Gas State Not Taxing Drilling

Strapped for cash, Pennsylvania may finally grant the governor a victory and enact a severance tax. But it's an uphill battle.
by | December 2017
Hydraulic fracking has "brought back great-paying jobs," says Steve Miskin, spokesman for Pennsylvania House Speaker Mike Turzai. (AP Photo/Ralph Wilson, File)

If your state is the only oil and gas producer in the nation that doesn’t have a severance tax, there’s going to be a lot of pressure on you to enact one. But given the amount of money involved, it’s easier to talk about creating such a tax than actually imposing it. In Pennsylvania, that talk has blossomed into a fight over more than just money; it now involves lobbying, environmental protection and the next campaign for governor.

Pennsylvania became the first place in the world to successfully drill for oil back in the 1850s. Over the past decade, however, natural gas has overtaken oil as the big game in the state. Pennsylvania is now the nation’s second-leading producer of natural gas, after Texas. Naturally, lawmakers are wary of tampering with the golden goose. “Right now, you have an industry that’s growing and not asking for state dollars, like others,” says Steve Miskin, a spokesman for state House Speaker Mike Turzai. “It has brought back great-paying jobs.”

The industry has spent more than $60 million on lobbying and campaign donations in the state over the past decade to ward off a severance tax on its profits. Industry officials like to point out that, even in the absence of a severance tax, Pennsylvania’s general business tax rates are often higher than those in other production states -- notably Texas, which doesn’t tax corporate income. What’s more, Pennsylvania five years ago imposed an impact fee on drillers, which generated $173 million last year. “The comparison with other states shouldn’t stop and start just with the severance tax,” says Kevin Sunday, chief lobbyist with the Pennsylvania Chamber of Business and Industry. “We have to look at the whole structure.”

But no one disputes that fiscally challenged Pennsylvania could use the money a severance tax would bring in -- easily as much as $100 million a year. So quite a few legislators are determined to pass one. The state Senate actually approved a severance tax earlier this year.

It’s been a tough sell in the House, though, and not only because Turzai and other Republicans are largely opposed. State Rep. Greg Vitali, a Democrat who became the first legislator to propose a severance tax nearly a decade ago, came out against the Senate package, arguing it would also loosen state control of drilling permits and weaken environmental protection. “I find myself in the odd position during these budget negotiations to suddenly be opposing it,” he says. “The passage of a severance tax now is linked to some very bad provisions that in my view would cripple the Department of Environmental Protection’s ability to do its job.”

Meanwhile, the severance tax has become a sensitive campaign issue. A leaked tape captured Republican state Sen. Scott Wagner, a likely gubernatorial candidate next year, predicting that passage of the tax would guarantee a second term for Democratic Gov. Tom Wolf, a leading severance tax advocate, because he’d have a big victory to tout.

The specter of handing Wolf a win has become the final and perhaps the biggest hurdle for the severance tax to overcome. “Both the Democrats and the Republicans,” Vitali says, “are viewing the severance tax through the lens of the gubernatorial election.”