Severances Taxes are Needed and Appropriate in West Virginia

by Duane Nichols on November 2, 2019

It’s Time to Raise the Natural Gas Severance Tax

From an Article by West Virginia Center on Budget & Policy, November 1, 2019

What if we used the wealth from our natural resources to invest in a brighter future for West Virginians instead of sending that wealth out of state?

Our new video out this week shows all the investments we could make in our people and communities if the natural gas severance tax was raised. This tax is largely paid by out-of-state corporations who remove the natural gas from here and send it out of state. Raising it would create a stronger revenue stream for investing in our schools, roads, colleges and universities while making sure corporations pay their fair share.

Fully investing in our public schools would be a great place to start! Math and reading scores are not where they should be to prepare our students for a successful future. The lowest-performing students are performing worse and experts cite a connection to the state’s opioid crisis and chronic poverty. This week’s Charleston Gazette-Mail cites our work.

With nothing in its “Future Fund” and severance taxes that are too low, West Virginia has very little to show for the hundreds of billions of dollars in coal, oil and natural gas that have been extracted from our state. As historian Ron Eller pointed out in his book, “Miners, Millhands, and Mountaineers,” West Virginia resembles a Third World nation, with growth but no development.

The good news is we can reverse our state’s “resource curse” by adequately taxing natural gas and using it to rebuild our economy so more people benefit from growth. The severance tax falls mostly on out-of-state producers who sell almost all of the natural gas out of state. This means drilling companies can’t pass much of the tax increase onto to us. They aren’t building several pipelines to keep the gas in West Virginia.

A higher severance tax keeps more money in West Virginia, money that can grow our economy and be invested in our communities. Today, producers pay a 5 percent severance tax on the well-head price. To put this in perspective, from 2010 to 2018, the price of natural gas declined by over 80 percent while production grew by nearly 600 percent. Raising the severance tax another 20 percent isn’t going to have much of an impact on production. If it did, producers could wait for the price to rise.

Research shows that a higher severance tax might move the drilling date forward, but it doesn’t necessary lead to less drilling. If severance taxes were all that mattered, then our drillers would all be moving to Ohio, where the severance tax is much lower than ours. They aren’t. Drilling depends less on taxes and more on proven reserves, quality of the resource, prices, infrastructure (e.g., pipelines) and transportation costs.

We can raise the natural gas severance tax by a lot, and out-of-state gas and oil producers will stay put. Just like they did in Alaska. If we invest that money wisely — putting some into the Future Fund, higher education, early childhood development, industrial energy efficiency, renewable energy for public schools, etc., it will create jobs now while more than paying for itself over the long run by creating stronger economic growth.

A recent Penn State University study found that, for every $100 million in severance taxes collected on oil and natural gas companies in Pennsylvania, the state would see a net gain of 1,100 jobs. This is largely because natural gas jobs are very capital intensive, whereas jobs in schools and health care are very labor intensive.

West Virginia policymakers would be smart to raise the severance tax now and use it to diversify our state’s economy before it’s too late and the gas companies inevitably file bankruptcy and reshuffle their assets like coal companies are doing now. The question is whether policymakers will be good CEOs for our state in the meantime, maximizing the benefits for our residents, or continuing to let the devil control our economy.


See also: Can WV Afford to Not Increase the Natural Gas Severance Tax?

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