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The Effect of Tax and Regulation on the Pennsylvania Oil Industry
Pennsylvania has a rich history involving the oil and gas industries. Northwest
Pennsylvania was home to the first successful oil well as Colonel Edwin Drake pioneered
the search for petroleum in Titusville in the year 1859 (“The story of oil in
Pennsylvania”, n.d.). As time progressed, Pennsylvania remained an innovator in the oil
and gas industry as the state was one of the leaders in a new form of drilling allowing
new depths to be reached and more oil extracted. In 2003, Range Resources was able to
drill a well in Washington Country that allowed them to discover which new areas of the
ground would be promising to drill into. The original idea was to drill into the Oriskany
Sandstone which has been an important producer of natural gas in Eastern West Virginia.
It was discovered that though the Oriskany Sandstone did not look as if it would be a
favorable drilling option, the Marcellus shale seemed as if it would be a prime location.
By 2005, Range Resources began producing gas drilled from the shale. As technological
advances occurred allowing new methods of drilling, such as the extremely important
horizontal drilling and hydraulic fracturing, more companies entered the play in the area
to cash in on the large reserves. These reserves were discovered to be very large as it is
estimated that fifty trillion cubic feet of natural gas is available for extraction. Such a
large reserve to be cashed in on caused a boom in the area when it comes to this industry
(Kelsey, 2016); (King, 2015); (Harper & Kostelnik, n.d.).
Because the Marcellus region is considered an unconventional reservoir, the only
way to obtain the natural gas from inside would be through fractures in the rock itself.
These fractures could be natural or created using the new method called hydraulic
fracturing (Harper & Kostelnik, n.d.). Natural fractures were difficult to drill with older

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methods of drilling, but with horizontal drilling more of these fractures could be accessed
creating a sustainable amount of production. Because the horizontal drilling goes
perpendicular to the surface underground, there is a much better chance of hitting these
fractures and being able to extract the oil as the fractures usually are vertically situated.
Horizontal drilling also allows the boring of numerous fractures, allowing a steady flow
to be removed unlike before where only one at a time could be harvested. This method
caused enormous growth as the more efficient harvesting makes it more cost effective
and allows some horizontal wells to yield millions of cubic feet per day. A yield that high
makes these wells some of the most productive gas wells in the Eastern United States. As
mentioned before, in addition to the new method of horizontal drilling, hydraulic
fracturing, which is sometimes referred to as hydrofracing, has become increasingly
popular in the Marcellus shale region. Hydraulic fracturing is the process of using a water
or gel to create a high pressure situation that causes the rock surrounding the bore to
fracture. More fractures allow for more gas to be extracted creating higher revenues for
those drilling (King, 2015).
New drilling opportunities moving in gave a positive economic effect on the areas
that were entered. An increase in jobs occurred and more money was infused into the
local economies. Land owners in the area who owned the mineral rights on their land
were able to receive large signing bonuses. In the beginning, land owners who consented
to the use of their property for a gas lease received a bonus of about one hundred dollars
per acre, but as the industry blew up, so did the size of the bonus as it began to reach as
high as five thousand dollars per acre by 2008 (Kollar, 2016). In addition to property
owners collecting the signing bonus, they also receive royalties from the gas drilled from

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their land. The usual royalty for allowing the use of land is twelve and a half percent of
the resources drilled from that property, however, a more desirable than average piece of
land can command a higher royalty percentage which results in a very large payback. A
productive well could earn lucky land owners hundreds of thousands per year for the
duration the output stays fruitful. The output, however, tends to decline on a yearly basis
as the product is depleted. The Marcellus Shale as a whole is expected to do well with the
ability to maintain the economic boost it has granted for multiple decades to come. Even
if the Marcellus Shale begins to be exhausted, the Utica Shale is expected to be just as
fruitful. Located just a few thousand feet below the Marcellus Shale, it may be more
expensive to drill down, but it will provide an opportunity for the gas drilling industry to
remain in the area for a longer time (Kelsey, 2016); (King, 2015).
With businesses throughout the years moving in and making big money on oil and
natural gas in the region, the opportunity for the state to gain revenue from this industry
was apparent. Many different taxes and regulations have been put in place for many
different reasons such as revenue generation for the state and local governments and
using them as a deterrent from using certain practices that may be harmful to the
environment. Oil has been a massive revenue generator as three oil companies in the
United States paid out a total of 289.7 billion dollars in corporate income taxes between
the years 2007 and 2012. This is the highest total in that span. The three companies
combining for that total were ExxonMobil, Chevron, and ConocoPhillips (Starr, 2014).
With so much revenue being collected for governmental entities, it is always tempting
officials to raise the taxes even higher to generate even more. However, dong this could
have negative economic effects if the taxes are raised. When determining whether or not

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to raise or even lower taxes in any industry, it is important to analyze the current laws
that are in place as well as investigate any trends that may have occurred in the past when
such action has taken place. There can be serious positive or negative economic
repercussions that could occur and have occurred in the past when a new tax or regulation
is introduced.

Why are there taxes on oil and gas?
When it arises whether states should raise or lower taxes on any industry, it is
important to determine why the tax is being set in place. An obvious answer as to why a
state would tax anything is that the revenue can be generated and used by the government
for various things, but the reason to tax a certain industry in particular can vary. A rise in
tax on one entity could stem from a desire to counteract a reduction or complete removal
of a different tax. An example of this strategy is the implementation of gas wells in the
local property taxes. In some states, oil and gas wells are excluded from local property
taxes. This does not give them a break though. In the states that are exempt from those
taxes, the tax rate on production tends to be about two-thirds higher (Weber, 2016).
Using a tax as a deterrent has been used for a long time on items such as
cigarettes as they are perceived as vices by the state as they can directly lead to premature
death. The tax on cigarettes is in place to lower the amount of people that smoke by
making cigarettes more expensive than they would be otherwise. This strategy has
worked with cigarettes, especially with people of a lower income, as the Congressional
Budget Office has concluded through research that increases in cigarette prices by ten
percent has reduced minor’s smoking by between ten to fifteen percent and adult

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smoking by between three and seven percent (Marr & Huang, 2014). This same principle
can and is being used in the oil and the gas industries. Lawmakers for years have been
using taxes on resource consumption as a way to reduce the depletion in the name of
sustainability. They believe that the exhaustion of natural resources is selfish and
unethical against those in future generations that would not have these resources at their
disposal. It is believed by some that drilling companies are wasteful and a tax that
encourages efficient production would help the preservation of the earth’s natural
resources for future generations without too much of an economic fallout (Hotelling,
1931, p. 137-8).
In addition to preserving reserves for the future, a tax can be used to address some
of the environmental fallout that drilling can cause. Pennsylvania has a fee, called the
Pennsylvania Impact Fee, which is a method of collecting funds from the drilling
companies that leave an imprint behind as a way to fund the reparations that must be
made. Usually, road restoration is one of the main costs left behind that this fee helps
cover. Environmental restoration is another large cost for the local governments to
address with this money (Weber, 2016). Since the impact fee was enacted as a part of
Governor Tom Corbett’s Act 13 in 2012, over eight hundred and fifty million dollars
were collected as a result.
Current Pennsylvania taxes in place
Like other types of laws, tax on natural resource consumption vary from state to
state. There can be differences among rate, how the rate is applied, when a tax is leveed,
and more. Because of this, sometimes the available tax rates that can be acquired quite
easily when searching can be applied in a different form than that of another state leading

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to some misinformation in how much is actually being applied. Some states have rates
that apply to the typical dollar of production while others use the rate on a subset of
production. Some states even have multiple rates that are applied differently based on
circumstance. With the introduction of Marcellus Shale drilling into Pennsylvania and
surrounding states and the economic boom that was brought because of it, there has
become a new focus from lawmakers, companies, and citizens alike upon the state tax
policies as much more revenue is available to be taxed (Weber, 2016).
Oil companies fall under the category of the liquid fuels sales tax. The liquid fuels
sales tax applies to oil companies, so it is very important to note what the laws define an
oil company as in order to determine what companies are required to pay this tax. In the
state of Pennsylvania, an oil company that would fall under the jurisdiction of the liquid
fuels tax is defined as every corporation, association, joint-stock association, partnership,
limited partnership, co-partnership, natural individual or individuals, and a business
conducted by a trustee or trustees wherein evidence of ownership is evidenced by
certificate or written instrument, formed for or engaged in the sale or importation of
petroleum products within this Commonwealth; or anyone deemed to be an oil company
under 75 Pa.C.S. §§ 9501 or 9502(f) (relating to definitions; and imposition of tax); or
anyone who elects to be an oil company under 75 Pa.C.S. § 9502(i) (61 Pa. Code §
351.1). This tax applies to the use of petroleum products. A petroleum product is a
product that is completely or partially derived from crude oil and is used for operating a
motor vehicle on public highways. The end product is a key to determining whether or
not the tax applies as the liquid fuels tax only applies to products that are to be used to
propel motor vehicles and not for products that will be used off-highway. Examples of

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petroleum products are gasoline, gasohol, diesel fuel, LP gas, and kerosene (61 Pa. Code
§ 351.1). The liquid fuels tax is a 3.5% tax on the revenue obtained from the first sale of a
petroleum product made within the Commonwealth of Pennsylvania. The first sale is the
sale of the petroleum product to either a wholesale dealer, retail dealer, a consumer, or
direct use of the product. This occurs immediately after the petroleum product is
produced or imported into Pennsylvania. There is a way for the companies to defer this
tax. If the purchasing company chooses to pay the Oil Company Franchise Tax on its
subsequent sale or use, the selling company can defer the 3.5% tax (61 Pa. Code § 351.3).
The oil company can value based on actual sales or the average wholesale price.
The Pennsylvania Impact Tax, as previously described, is a fee that is on a tiered
system that causes the actual amount required to be paid to vary (Commonwealth of
Pennsylvania, Independent Fiscal Office, 2014). This fee is a per-well tax, meaning that
each individual well is hit with an impact fee rather than per company, and is used for
unconventional gas wells. The tiers at which each well are taxed are based on various
factors. Age of well and the price of natural gas are two of the factors that help determine
the size of what needs to be paid (Weber, 2016). There is a multi-year schedule that
coincides with the natural gas price that companies use to know how much is owed. The
schedule is set up to have years ranging from year one to year fifteen (“Act 13 of 2012”,
n.d.). The impact fee, the only one of its kind, was signed by Pennsylvania Governor
Tom Corbett as a part of Act 13, which became an amendment in 2012. Because it just
became law in 2012, any wells drilled before 2011 were considered to have been drilled
in 2011 for the purposes of the fee in order to collect a full schedule of revenue
(“Pennsylvania Impact Fee Summary”, n.d.).

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Figure 1 – Impact fee schedule table companies used to determine how much they
owed when Act 13 was passed. Retrieved from: (“Pennsylvania Impact Fee Summary”,
n.d.).
The Impact fee is unique in the fact that it is distributed among local governments
and state governments. The fees are collected by the first day April each year and then
are distributed between the state and local governments by the first day of July. This
action of collecting and disbursing is done by the Pennsylvania Utilities Commission.
Another duty of the Pennsylvania Utilities Commission is to issue opinions to the local
governments on proposed ordinances while also reviewing local ordinances already in
place. The most important duty though is the collection of the Impact Fee and ensuring
all drilled unconventional gas wells are paying it. The producers self-report to the

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Pennsylvania Utilities Commission and then the reports are compared to the official
database maintained by the Department of Environmental Protection. After collected, the
fees must be distributed (Sacavage, 2013).
There are earmarks that a certain amount must be sent to state agencies in order to
equipoise the environmental impact left by the drillers. The earmarks are distributed to
the state government to be used to offset statewide drilling impact. In 2012, the first year
the Impact Fee was collected, twenty-five of the over two-hundred million was
earmarked. The money remaining after what is earmarked to the state government goes to
the local governments via wo funds in a set fashion. Sixty percent of the funds remaining
after earmarks are given to the Unconventional Gas Well Fund. The Unconventional Gas
Fund is the distribution that the counties and local municipalities receive. Breaking it
down further, thirty-six percent of the money in the Unconventional Gas Fund goes to
counties with wells, thirty-seven percent goes to municipalities with wells, and the
remaining twenty-seven percent going to municipalities in counties with wells. Half of
the money going to the municipalities in counties with wells are allocated to
municipalities within five miles of the wells while the rest is spread within the county.
For all three of the distribution locations, there is a formula to determine the amount to be
distributed to each eligible county, municipality, or municipality within a county with
wells. For a county, the amount to be received is calculated by dividing the number of
wells in the county by the amount in the Commonwealth of Pennsylvania as a whole and
multiply the resulting percentage by the amount of money available to be distributed.
This same formula is used for municipalities and municipalities within counties as well.
By law, there are thirteen different usages that these funds can be spent on, but the laws

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are intentionally written in broad terms to allow flexibility for the local governments
(Sacavage, 2013). The thirteen categories are pubic infrastructure construction, storm
sewer systems, emergency prep, environmental programs, water preservation, tax
reductions, housing, information technology, social sciences, judicial services, capital
reserve fund, career centers, and planning initiatives (“PA PUC Interactive Impact Fee
Reporting Website”, n.d.).

Figure 2: 2014 usage of funds from Impact Fees by counties and municipalities.
Retrieved from: (“PA PUC Interactive Impact Fee Reporting Website”, n.d.).
The remaining forty percent of the revenue from the Impact Fee goes to the
Marcellus Legacy Fund, a fund devoted to initiatives with potential local impacts and
value. Much like the Unconventional Gas Fund, the monies in the fund are distributed to
different areas. Twenty percent of the Marcellus Legacy Fund is used by the
Commonwealth Financing Authority to issue grants to assist in the renovation of the

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areas with acid mines, abandoned wells, and places with a poor water quality. Another
ten percent is allocated to the Environmental Stewardship Fund to be used on special
preservation projects. Twenty-five percent, with a minimum of forty thousand dollars, is
distributed by PennDOT for highway bridge improvement. This is used to replace or
repair bridges that may have been overused by large oil transport trucks and is assigned
based on county population. A quarter of the Marcellus Legacy Fund is taken by the H2O
PA program for use in water and sewer projects. Environmental Initiatives receive
another portion of the Marcellus Legacy Fund at fifteen percent, but each county receives
a minimum of twenty-five thousand dollars. It is distributed based on population for use
on trails, conservation projects, heritage parks, and similar enterprises. Finally, five
percent of the Marcellus Legacy Fund is allocated to oil and natural gas projects by the
Department of Community and Economic Development. The Impact Fee is enforced by
the Pennsylvania Utilities Commission. Untimely payments by the producers are met
with harsh penalties from five percent and up to twenty-five percent per month. In
addition to the penalty, failure to pay will result in a producer being stripped of the permit
to drill (Sacavage, 2013).
When drilling a well, application fees for drilling permits are another way the
state generates revenue from the companies. With conventional wells, the total bore
length determines how much an entity will pay for a permit application. A value is
assigned to each five-hundred feet of bore length that must be paid in order to send an
application. Lengths over twelve-thousand feet pay one-hundred additional dollars over
the twelve-thousand foot value for every five hundred feet over that length.
Unconventional wells have a different application fee system. There are only two

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possible values for the application fee of an unconventional well permit. A vertical
unconventional well has a permit fee of four thousand two hundred dollars. A nonvertical
unconventional well cost eight hundred more than the vertical one. Adding fees for the
permit may only cut a small amount into profits, but any extra costs will have an effect on
a company no matter how small. (Pa. Code § 78.19)

Figure 3: The Application fee schedule for conventional wells. (Pa. Code § 78.19)

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In addition to the taxes and fees related to the business, oil and gas companies still
must pay the standard Pennsylvania state taxes. Pennsylvania’s corporate net income tax
sits at just under ten percent of apportioned taxable income. This corporate income tax is
one of the highest rates for a state corporate income tax in the country. Owners of entities
that are organized as S corporations, limited liability companies, or limited partnerships
must pay the personal income tax of three and seven hundredths percent of taxable
income. Also, there is a sales and use tax when personal property is either sold at retail or
used. With the sales and use tax, there is an exception for the equipment used directly in
mining, but there are many forms of equipment that do not fall under the exemption.
Finally, under the realty transfer tax, mineral rights acquisitions are taxed at one percent
state-wide, and also usually one extra percent locally (Cosmo Jr., 2015).
Though not necessarily a tax, a large expense for oil and gas companies comes in
the form of government regulation. The state Department of Environmental Protection is
the entity that determines what regulations need to be placed on the oil and gas industry.
In order to comply with regulations placed on them by the state, companies have to spend
more money and in some cases avoid certain practices while drilling. Estimates from
January of 2016 show the newest regulations could cost the industry between six and
thirty-one million dollars annually. Initial costs could be higher, with a price tag of what
could be seventy-three million dollars in the first three years to become compliant. One
of the examples of costly regulations is the banning of fracking pits. This ban was
instituted to protect ground water as it was believed that the fracking pits contributed to
some contamination. The newest batch of regulations have been deemed a midpoint, not

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an endpoint, and it is expected that there will be consistent improvement in the
regulations on the shale industry. (Saha & Muro, 2016)
The severance tax proposal
With Pennsylvania Governor Tom Wolf officially proposing a severance tax in
early 2016, a great debate has ensued as to whether it would be beneficial. A severance
tax, sometimes called an extraction tax, is a tax paid when natural gas is removed from
the ground. Severance taxes are used in almost every state. Iowa, New York, and
Pennsylvania are currently the only states to not have a severance tax in place (“Oil
Severance Tax”, n.d.). Before Tom Wolf’s proposal, the Pennsylvania House of
Representatives passed a severance tax in 2010, but the Pennsylvania Senate did not
allow it to go through (Cosmo Jr., 2015). The proposal that Governor Tom Wolf has
created would not only create a severance tax, but create one of the highest severance
taxes among major gas producing states. The severance tax in his proposal is modeled
after the one that is in place in West Virginia, which is at five percent. This new
severance tax would replace the impact fee, as it is seen that the impact fee has been a
substitute for a severance tax. The difference in expected revenue between the tax and fee
is large as Wolf claims the severance tax would raise one billion dollars per year while
the impact fee has not even generated that much since 2008. Other lawmakers believe
that his projections may be a bit optimistic, as their forecasts show that there may be
multiple repercussions not only for the oil companies that pay more, but also for the
contractors and communities that receive the earnings of the Impact Fee currently
(McKelvey, 2015).

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The severance tax against the Impact Fee of Act 13 has been a hot debate in
Pennsylvania since Act 13 was put in place. With Pennsylvania being the only state to
have anything similar to the Impact Fee and being one of the only states without an
extraction tax, the Impact Fee has always been seen as an alternative to a severance tax.
Former Pennsylvania Governor Tom Corbett, the governor who was in command when
Act 13 was passed, was adamantly opposed to a severance tax. With a new governor,
Democratic Governor Tom Wolf, and state tax revenue expected to be about two hundred
million dollars below expectations, it appears as though there is an opening to pass a
severance tax in the near future, possibly as soon as the next legislative session. (Swift,
2016) Opposition for the new severance tax consideration have cause for concern, as the
severance tax would send control of the funds to the state, while the Impact Fee is
dispersed to the counties and municipalities with drilling in the area. The money
earmarked to fix roads and help reinvigorate the environment that has felt the effect of
drilling in the area will not be available, which could lead to distress in the communities
with drilling. (Cosmo Jr., 2015)
The effects of adding tax
When determining whether raising taxes is a good idea, it is important to have a
solid grasp on the global market to ensure the macroeconomic conditions will support a
tax hike. Though some believe that the United States can be truly energy independent, oil
prices on a global scale have an effect on what the oil prices can be in America. Over the
past two years, oil prices have dropped over seventy-five percent as the supply of oil on
the market has drastically risen. Saudi Arabia, one of the leaders in oil production, has

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been one of the key players in providing a huge supply of oil to the marketplace, causing
the drop in prices recently. Saudi Arabia has even been known to purposefully keep
prices down to adversely affect other countries. After an attack from Iran in early 2016,
analysts concluded that in an effort to keep Iran from being a beneficiary of their own oil
supply, Saudi Arabia intentionally refused to cut their production, a move that would
have raised oil prices. Energy economist James Williams of WTRG concluded at the time
that this was Saudi Arabia’s best move as keeping Iran broke was the most favorable
short term option. Even though designed to hurt Iran, the low oil prices have an effect on
everyone (Saefong, 2016). With oil prices lower, every expense counts as the profit
margin for oil companies in Pennsylvania get smaller and smaller. Both revenues and
profits are declining due to the price drop and hits from the federal government adding a
ten dollar per barrel tax on oil. Due to this constriction on profit, the capital budgets of oil
companies have to be cut in order to stay profitable (“The Revenue Proposal”, 2015). The
employment in the industry has been one of the first areas to take a hit. Nationwide, about
seventeen thousand of the one-hundred eighty-five thousand oil and gas jobs have been
cut according to the United States Department of Labor. If the jobs cut within the supply
chain are also considered, that number is much higher (Woodall, 2016).
In the same mold as job loss, the number of oil rigs are hitting a steady decline as
well. In the United States, the rig count has declined to less that twenty-five percent of
what the total was in 2011. Pennsylvania has been among the states taking a shot, with
only twenty-five rigs remaining as of a yearly report released on January 8, 2016. This
number is down from fifty-one the year before and one-hundred fifteen in 2011.
Although Pennsylvania has yet to take a hit on the scale of some of the larger drilling

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states such as Texas, Oklahoma, and North Dakota, it is still very troublesome that the
number of oil rigs and oil jobs are on such a decline.

Figure 4: Predictions on how the decline in oil rigs will effect employment opportunity
based on measurements from January 2015 to March 2016. Retrieved from: (Saha &
Muro, 2016).
Although the state is fully aware that oil prices are exceptionally low, they still
think the implementation of a severance tax should still be considered. Jeff Sheridan, a
spokesman on behalf of Governor Tom Wolf, states that a tax would still be feasible
because even though the prices are so low, they have nowhere to go but up. Those
involved in the industry believe they are being punished by lawmakers as not only do
they have to pay every tax a normal Pennsylvania business has to pay, they have the
Impact Fee tacked on as well. If the Impact Fee is switched out for the severance tax, the

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cost of doing business will go up even further. In contrast to what is looking to be passed
by Governor Wolf, oil companies and those who work or have been laid off are looking
for policies to be enacted that will give the companies a bit of a break in order to promote
investment opportunities and employment (Woodall, 2016).
With the squeeze on profits caused by low prices and high expenses, oil
companies have taken hit in stock prices. Some major players have seen catastrophic
stock drops during the last year, to the point where some might even consider it a crash.
Chesapeake Energy had their stock drop eighty percent over the past year. Southwestern
Energy had their stock fall seventy-four percent. One of the more well known companies,
Range Resources, also took a hit of a fifty-two percent drop in stock. Some of the smaller
drillers are taking it even worse as they are being forced to file for bankruptcy (Woodall,
2016). Not only is this a problem in Pennsylvania, this is occurring throughout the
country. Pennsylvania though, is one of the only ones looking to raise taxes specifically
on the declining industry. Haynes and Boone, a limited liability company who tracks
bankruptcies throughout the United States and Canada, has found that the number of oil
patch bankruptcies have increased each month since January 2015 (“Oil Patch Bankruptcy
Monitor”, 2016).

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Figure 5: The number of oil patch bankruptcies tracked by Haynes and Boone LLC
tracked each month from January 2015 through August 2016. Retrieved from: (“Oil
Patch Bankruptcy Monitor”, 2016).
Analysis of the tax system in Pennsylvania
With the unfavorable conditions currently in the industry of oil and gas, it would
seem to be a poor time to begin to implement more taxes and regulations on to these
companies. The price of oil is at the lowest it has been since the 1990s, leading to a drop
in stock, some bankruptcies, and large job cuts that caused Pennsylvania to have one of
the lowest employment growth rates in the country. In 2015, according to the Federal
Reserve Bank of Cleveland, Pennsylvania’s employment grew by less than one percent,
less than half of the national average in that year (Conklin, 2016). Adding more expenses

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to the oil companies, as switching from the Impact Fee to a severance tax would be
projected to do, could cause even more job loss or even have companies move their
drilling completely out of the areas. Not only would the profit squeeze hurt the
companies, but it would also hurt some Pennsylvania citizens. Those who once worked in
oil and get laid off will have to find new work. People in the communities where oil
provides most of the local revenue through the Impact Fee would have less money for
expenditures. Some of the many people who use oil companies as a source of income in
their tax-deferred retirement accounts may lose money from their energy-based
investments. If oil companies are pressured by low profits to shut down, many lives could
be altered. Because of what some of the effects of a higher tax could be, Pennsylvania
lawmakers should hold off on passing a severance tax until a more favorable global
marketplace exists. There is a fine line that must be walked with taxation. If taxes are
high, it may seem fruitful in the short term, but in the long run the slowing or departure of
business could lead to less revenue long term. With the oil market seeming to be on the
decline, it will be important that the state does not stunt an industry that is very important
to its own revenue and the economy as a whole.
The possible switch from the Impact Fee to a severance tax has been debated
within the past year in the state of Pennsylvania. One of the most important aspects of the
Impact Fee is that the revenue received from it is given back to the communities that is
directly affected by drilling. If the severance tax is passed, which would revoke the
Impact Fee, these earmarks will no longer be in place. Without the earmarks, the state
government will decide how to allocate the proceeds. Pennsylvania Governor Tom Wolf
has already stated some ideas on where he would like to distribute the funds citing

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education and some other programs. Although state education funding is important,
municipalities losing their Impact Fee money can result in the deterioration of roads with
high traffic from trucks heading to rigs and a lack of environmental restoration. The
Impact Fee distributions are very important to these areas as without them it will be
difficult to minimize the footprint left by drilling. The current system stresses the
importance of both state and local governments receiving funds as there is a set
distribution that includes both (Sacavage, 2013). The switch to a severance tax sending
all of the funding to the state could lead to unintended consequences at the local level as
their much needed revenue would be greatly reduced.
The best solution to the debate would likely be to keep the tax code the same or
even reduce the amount companies pay until the oil prices globally increase. Any
increase could be dangerous to the sustainability of the industry inside of Pennsylvania. If
it is unnegotiable that a severance tax be implemented, a small percentage rather than
being one of the highest in the country would be best because the commonwealth should
not risk chasing more companies out of the region. Another issue regarding a switch is
that the state should keep the structure that shares revenue with local governments. Also,
regulations on the industry should be reduced in order to create an environment that
allows business to grow in a period of time where it is difficult to do so.
Conclusion
Oil companies are required by law to spend a lot of money to comply with the
government. They must pay federal and state taxes as every other type of business has to.
In Pennsylvania, the unique Impact Fee must be paid according to the schedule set by

THE EFFECT OF TAX AND REGULATIONS ON THE OIL AND GAS INDUSTRIES

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Governor Corbett in Act 13. This Impact Fee is split among the local and state
governments in order to assist in covering the environmental costs of drilling. In addition
to this, the liquid fuels tax must be paid if the gas being drilled is going to be used as fuel
on public highways. Beyond taxes, it costs a large amount of money to pay for fees and
to become compliant with regulations. A severance tax has been proposed to replace the
Impact Fee by the state government. If the Impact Fee is replaced, tax rates will increase
and the money that is currently going to local governments will mostly go to the state
government.
All of these extra costs incurred after production can have negative effects. With
prices worldwide being historically low, profit margins have grown increasingly slim
causing job loss, stock declination, and some bankruptcies. With such troublesome
market conditions, it would seem to be an inopportune time to raise tax on oil like the
severance tax would do. A tax hike could hurt revenue in the long run as companies
could either shut down or relocate to a state with a more favorable tax code. It would
behoove the state to hold off on a tax raise or even lower what they have to pay until the
global prices begin to increase. A misstep that causes more departures of oil companies
could deal a catastrophic blow to in important revenue steam for the state.

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23

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