The moving pieces in state budget talks in Harrisburg are a lot like the game of Jenga, in which the object is to keep rearranging a stack of wooden blocks without toppling the tower.
One of those pieces is Gov. Tom Wolf’s proposal for a severance tax on natural gas drilling, which he wants to impose so the state can funnel $2 billion more to public schools over the next four years. The state missed an opportunity when it failed to adopt a severance tax in 2012 and instituted an impact fee instead. Although that fee has generated about $200 million a year primarily for municipalities, the state as a whole needs and deserves compensation for the extraction of its underground resources and its costs associated with the drilling.
That doesn’t mean Mr. Wolf has it right. His starting point is sound — a 5 percent extraction tax rate based on the value of the gas is comparable to Oklahoma’s and West Virginia’s — but the problem is the other components of his plan. There are three elements that drive up what would be the effective gas tax rate in Pennsylvania: a tax based on the volume of the gas of 4.7 cents per thousand cubic feet; a price floor of $2.97, which means drillers would pay more when prices are at their lowest; and a lack of a deduction, which other states provide, for some post-production costs such as shipping.
Those three items really add up. Using Mr. Wolf’s plan and current taxes of other gas-producing states, Pennsylvania’s nonpartisan Independent Fiscal Office looked at what the impact would be on a new well drilled in 2018 over a 30-year span. Pennsylvania’s rate would be 7.3 percent, compared with 0.8 percent using the current impact fee and the tax applied in Ohio, 5 percent in West Virginia and Oklahoma and 3.1 percent in Texas. If Pennsylvania would impose just the 5 percent extraction tax, that would be its effective rate.
Pennsylvania can’t afford to keep charging less than other states — it has a budget deficit in excess of $1 billion, it needs to send more money to local schools and there are other pressing needs. However, it cannot afford to go overboard. It is undeniable that Marcellus Shale drilling has created jobs and economic vitality in parts of the state, and the hope is that business will grow, not shrink.
Anyone who has ever played Jenga knows that each block and its impact on the others must be carefully considered. Lawmakers can help Pennsylvania by imposing a fair, 5 percent extraction tax, but they can hurt it if they push the outer limits of feasibility with the other elements of the governor’s plan.
To make matters even more challenging, legislators have to balance the extraction tax Jenga block with those dealing with income, sales and property taxes; education funding; state employee pension reform; economic development and job creation.
June is going to be a complicated and potentially transformative month. Mr. Wolf and the Legislature must make sure the tower is still standing when they are done.
First Published: June 7, 2015, 4:00 a.m.