Extras on Excise: Will 2015 Bring Severance Tax Changes in Ohio and Pennsylvania?

A few states—notably, Pennsylvania and Ohio—have debated this year whether or how to impose severance tax on the oil and gas industry. Will any change actually come?

The governors of both Pennsylvania and Ohio think the oil and gas industry should pay more money to state coffers via severance tax, which is a tax on the extraction of natural resources. In Pennsylvania, Gov. Tom Wolf (D) has proposed a 5 percent severance tax plus $0.047 cents per thousand cubic feet of volume on natural gas extraction, according to an April 3 article in Bloomberg BNA’s Weekly State Tax Report.

Pennsylvania sits atop the Marcellus, one of the seven most prolific areas for shale resources and production in the nation, according to the U.S. Energy Information Administration April 13 Drilling Productivity Report. Instead of a severance tax though, right now Pennsylvania producers pay a flat impact fee on wells annually, with the fee amount based on the average annual price of natural gas, and declining over 15 years.

Ohio’s current severance tax rate is $0.20 per barrel of oil and $0.03 per thousand cubic feet of natural gas. Gov. John Kasich (R) wants to increase that, and earlier this year he proposed a 6.5 percent severance tax on oil and natural gas and a 4.5 percent severance tax on the gross market value for natural gas liquids.

But the Ohio House is pushing back, cutting out the governor’s severance tax hike proposal, among many other proposals, in legislation introduced earlier this month, according to Cleveland.com.

Most states do not depend on severance taxes as a major source of revenue. The biggest source of revenue for states in 2014 was individual income taxes—$310.8 billion total, and 0.4 percent more than 2013—according to the U.S. Census’ 2014 State Government Tax Collections Report, released April 16. To put it in perspective, individual income taxes made up 35.9 percent of total state government tax collections in the U.S. Census report, while severance taxes were lumped in with the “other taxes” category and still only made up 3.7 percent of total state government tax collections.

Ohio collected a little more than $10 million in severance tax in 2014, according to the U.S. Census report. Pennsylvania collected none, but that is because its “impact fee” is not a tax. However, both governors have plans for how they want to spend the severance tax revenues if they get their ways. Kasich wants to use increased severance taxes as part of a bigger plan to lower income taxes and increase taxes on consumption, as he discussed in his budget proposal.  And Wolf is selling his Pennsylvania severance tax proposal as a way to boost education funding, according to Lancaster Online.

Continue the discussion on our Bloomberg BNA State Tax Linkedin group: Do you think severance taxes are ripe for legislative action this year?

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