Energy Tomorrow Blog
Posted April 30, 2015
The Hill’s Congress Blog (Weinstein): In response to significantly lower oil and natural gas prices, America’s energy sector is retrenching rapidly. The drilling rig count has dropped by more than 50 percent over the past year, while companies large and small have announced sizeable layoffs and cuts in their capital budgets for 2015 and 2016. Nonetheless, several states, including Pennsylvania and Ohio, are considering imposing or hiking production taxes—called severance taxes—on oil and gas operators. These increases will be in neither the public’s nor the industry’s best interests.
Governors and state legislators should keep in mind that in today’s competitive environment, producers in their states are simply “price takers.” What this means is that any factor increasing the marginal cost of production, such as new or higher severance taxes, will put that state’s operators at a competitive disadvantage. The result will be lower production today and diminished investment in the future.
What’s more, as the experience of Texas and other energy producing states has demonstrated over the years, severance taxes are not dependable revenue sources because they rise and fall with changes in output and price. With prices for oil and natural gas expected to remain low for an extended period, their contribution to total state revenues is likely to be quite small and not enough to offset any sizeable cuts in other taxes. In addition, it’s never good public policy to increase the tax burden one specific industry as opposed to imposing or hiking taxes generally across all industries.
Posted March 6, 2015
More on the plan by new Pennsylvania Gov. Tom Wolf to increase taxes on energy production in the commonwealth.
As lawmakers mull over Wolf’s proposal to add a 5 percent tax on the value of natural gas at the wellhead, plus 4.7 cents per thousand cubic feet of gas extracted – effectively a 7.5 percent tax, according to Cabot Oil & Gas Corp.’s George Stark – the key issue is its potential effect on future energy development in Pennsylvania.
Certainly, fundamental economics holds that if you tax something more, you’ll almost certainly get less of it. And that should give lawmakers pause.