Pennsylvania, Ohio, and West Virginia share a lot in common, including job markets, highways, rolling hills, watersheds and natural resources. In some places, shale wells in close proximity to each other are in different states.
Yet each of our three states has taken a vastly different approach to taxing oil and gas drilling. Pennsylvania has a small drilling impact fee rather than a severance tax, while Ohio has a low, volume-based tax and West Virginia a conventional severance tax based on value. West Virginia’s rate is in the middle of the pack when it comes to severance taxes in the lower 48 states.
Suppose our three states got on the high road to economic development, taking a unified and coherent approach to tax policy to benefit the entire region and its residents?
That is the vision we have and why we are calling on the governors of our three states to support a severance tax with a rate no lower than that of West Virginia — without tax holidays, exclusions or credits.
All three states have experienced a rapid increase in shale drilling over the past five years, bringing some new jobs but also growing costs associated with spills, increased demand for emergency services, a rapid jump in housing costs and increased road maintenance needs. An adequate severance tax will ensure that industry contributes to these costs and that they aren’t passed on to other taxpayers.
A common tax rate and structure would provide predictability for the industry and bring the region more in line with gas-producing states in the West and the South. Most important, a common approach would take taxes out of the competitive equation.
Legislation has been introduced in Ohio and Pennsylvania to put more adequate severance taxes in place, and the issue is already playing a prominent role in Pennsylvania’s gubernatorial election.
A severance tax in the Keystone State could go a long way to repair the damage from years of budget cuts. Pennsylvania could use severance tax dollars to better protect its environment, invest in public schools and colleges, and support programs that train workers to meet the demands of the changing economy.
The current fragmented approach to drilling taxes in Pennsylvania, Ohio and West Virginia has fueled a climate of interstate competition for the lowest tax rate. It is a race to the bottom that profits drillers at the expense of our states’ residents.
West Virginia’s severance tax rate, at 5 percent of the value of gas plus a small production-based assessment, has not deterred shale drillers. Most gas-producing states in the West and the South have severance tax rates that are higher than West Virginia’s. This is where discussions around a tax rate should start, not end.
In all three states, as well as in western states like Texas and North Dakota, drilling companies pay other business taxes. This should not be a factor in determining an appropriate severance tax. Severance taxes are specifically designed to recompense residents for precious natural resources that can be removed from the land just once, as well as for specific environmental, economic, and social costs associated with that removal.
We hope Governors Corbett, Kasich, and Tomblin will recognize what the elected leaders of most other energy-rich states do: That all residents in our region should benefit from the bounty of drilling.
Our state capitals may be hundreds of miles apart, but when it comes to shale drilling, our states are a lot closer than we think. Let’s acknowledge that and do all we can to maximize the benefits of shale drilling without putting our communities at risk.
Sharon Ward is the director of the Pennsylvania Budget and Policy Center. Wendy Patton is senior project director of Policy Matters Ohio. Ted Boettner is the executive director of the West Virginia Center on Budget & Policy.
PowerSource Voice is a regular feature offering insight and opinion on energy subjects. To contribute, contact Associate Business Editor Teresa F. Lindeman at firstname.lastname@example.org
First Published March 18, 2014 2:52 PM