A proposed severance tax on natural gas production in Pennsylvania would add to drilling companies' operating costs, but the revenue it would produce would yield positive results for the state's economy and residents, according to researchers at Penn State's Institute for Research in Training & Development (IRTD).

Because the market price of natural gas is established nationally, firms in the industry are best described as "price takers" who do not have the power to alter their prices without losing customers, according to David L. Passmore, co-author of the report, "Benchmarks for Assessing the Potential Impact of a Natural Gas Severance Tax on the Pennsylvania Economy."

"Because of this, we treated the revenue collected as a production cost that gas producers cannot pass along to customers," Passmore said.

Production costs imposed on oil and gas companies through a severance tax would create somewhat less employment, output and disposable income for Pennsylvanians, but those negative impacts could be more than offset by increased state and local government spending of the increased revenue, the researchers said. By 2015, each $100 million in additional production costs passed on to companies through a severance tax would result in a decline in total employment of 292, along with a $22 million decline in business sales and a $20 million decline in personal income; but over the same period state and local spending could increase total employment by 1,400, while business sales would increase $80 million and personal income would increase $20 million, the researchers said.

A $28 billion 2010-11 state budget passed earlier this year by Pennsylvania legislators did not include a severance tax on natural gas drilling that budget negotiators had agreed to in principle (see Daily GPI, July 2). Instead, Pennsylvania House and Senate members agreed to enact a severance tax by Oct. 1 to take effect by Jan. 1. No specific severance tax rate was adopted by legislators.

But with time running out on the legislative calendar before the November elections, even Pennsylvania Gov. Ed Rendell appears to have lost confidence that a deal on the severance tax will emerge in the state legislature (see Daily GPI, Sept. 10a). The governor has been insistent on the plan he first proposed in 2009, which calls for a 5% tax on sales, plus 4.7 cents/Mcf of gas extracted.

A 5% severance on the value of all Marcellus gas produced in the last fiscal year would have earned the state around $40.5 million, according to the head of the mineral resources division of the Pennsylvania Geological Survey (see Daily GPI, Sept. 10b).

According to a recent paper by Michael Wood, research director for the Pennsylvania Budget and Policy Center, Pennsylvania could set a severance tax rate between 30 and 35 cents/Mcf and be more than competitive with other gas-producing states (see Daily GPI, Sept. 3).

The IRTD report is available at www.PA-SevTax.notlong.com.

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