Leaving money on the table

Pennsylvania should tax the extraction of its natural resources, write RACHEL HAMPTON and BARRY RABE of the University of Michigan

One would be hardpressed to find a better poster child for the hydraulic fracturing industry than Pennsylvania. Billboards promoting natural gas litter the state’s highways. A Matt Damon film dubbed the state the “Promised Land.” As natural gas production has soared, the Keystone State has become an increasingly prominent energy exporter.

But the poster child of fracking has a dirty secret. It lags behind other major oil and gas producing states in tax policy. While most producing states — as many as 38 — tax energy production, Pennsylvania does not. All others, from Alaska to North Carolina, levy severance taxes directly on extraction of their oil, gas or coal. Revenues from such taxes allow these states to either address current budget needs, keep other taxes low or invest in their futures once drilling declines.

Even neighboring Ohio and

West Virginia levy severance taxes and have done so for several decades. Ohio Republican Gov. John Kasich is no fan of tax increases but has long argued that the state’s severance tax rate is too low, as this reflects the permanent loss of a natural resource. No state with a severance tax has ever seriously considered eliminating it since the Ulysses S. Grant presidency.

But as we explore in a newly published special issue of Commonwealth: A Journal of Pennsylvania Politics & Policy, Pennsylvania has remained the one exception to these trends among the states. While it does employ a very modest “impact fee,” the Pennsylvania Legislature routinely refuses to adopt a severance tax. The primary concern is fear that industry will shift drilling elsewhere — to another state or nation that already imposes such a tax.

Pennsylvania’s failure to adopt this universally applied tax has meant significant foregone revenue. Some projections estimate that a Pennsylvanian severance tax would have generated around $350 million for the state in the current fiscal year, potentially altering the state’s troubled fiscal situation.

Another consequence of Pennsylvania’s inaction is the lost opportunity to preserve revenues for longerterm challenges through a state trust fund. Such funds play the especially important role of safeguarding revenue during booms and busts. In many states, such as Texas, these funds have remained stable and reliable across generations.

North Dakota’s Legacy Fund constitutes a more recent example, having stockpiled nearly $5 billion in its first seven years of operation. It now provides funds through careful investment to balance the state budget.

North Dakota is a fiscally prudent state and neither Republican nor Democratic officials are tax advocates. But there is bipartisan agreement that the Legacy Fund was a wise move — and likely should have been launched decades ago to build a better future. West Virginia adopted a more modest version of such a fund in 2014.

North Dakota’s fund is modeled after the worldclass Norwegian sovereignwealth fund, which is preparing that Scandinavian nation for the inevitable decline and bust of oil production. Norway remains the global model of oil production, with extraordinary performance in sustained output, rigorous environmental protection and workplace safety, and a tax regime that underwrites a sovereign-wealth fund of nearly $1 trillion.

Pennsylvania continues to resist any severance tax, much less a trust fund, a political fact of life in the state since oil discoveries in the mid-19th century. This is ironic, given Pennsylvania’s prolonged boom-andbust history with fossil fuels and sizable long-term restoration costs after extraction ends.

In Harrisburg, governors and legislators squabble over whether drilling would continue in the event of a tax. In Bismarck, Austin, Denver and numerous other state capitals, leaders decide how best to invest the proceeds from a tax that enjoys bipartisan support.