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from Penn State's Institute for Research in Training & Development
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Précis of presentation
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The Marcellus Shale natural gas play has the potential to provide an important source of energy for the U.S. and to create significant economic impacts for Pennsylvania. However, the Marcellus Shale development opportunity also has generated controversy about its potential environmental, safety, and health impacts.
Whether to impose a severance tax on natural gas produced—and the structure, rate, and exemptions for such a tax—has been a focus of vigorous legislative and public attention and debate. A number of severance tax proposals have been offered. The potential impact of a natural gas severance tax on the Pennsylvania economy has received slight analytical attention, even though the Pennsylvania General Assembly intended to enact a natural gas severance tax by October 1, 2010.
The research reported in this presentation was designed to estimate the magnitude of the impact on the Pennsylvania economy of a Pennsylvania natural gas severance tax. We benchmarked the impact of every $100 MM of revenue collected from a natural gas severance tax between 2011 and 2015 on gross state product, employment, income, and population in Pennsylvania.
Of course, what is revenue for the Commonwealth is, at the same time, a production cost for Pennsylvania gas producers. For this reason, we treated the revenue collected as a production cost that gas producers cannot pass along to customers. Also, some yet–to–be–decided plan will allocate revenue collected to state government and to local county and municipal governments. Therefore, we also considered the economic consequences for Pennsylvania of spending the severance tax revenue collected under various revenue distribution plans.
Severance tax and revenue spending plans that actually have been proposed are not evaluated in our analysis because the revenue yield and spending distribution for each plan have not been specified completely by their proponents. The revenue yields from each plan are dependent on the volume and price of gas extracted, which are factors that are exogenous to any tax structure and rate plan. The spending distribution plans will evolve through fiscal and political negotiation. As a consequence of these information constraints, we chose to benchmark the impact of every $100 MM in severance tax revenue collected—treated in our analysis as $100 MM of production costs for the Pennsylvania oil and gas industry—on the Pennsylvania economy. In addition, our benchmarks take into account the potential impacts of distributing the $100 MM revenue through state and local spending and through deferring spending by saving some revenue to mitigate environmental, safety, and health problems that might occur. In this way, we seek to provide a yardstick by which various tax and spending plans can be measured.
The REMI Policy Insight model was applied to conduct simple experiments that simulated the outcomes of various scenarios that describe the potential economic and demographic impacts of each $100 MM of severance tax collected, along with the current and deferred spending of these tax revenues by state and local authorities. Each $100 MM of production costs added to the Pennsylvania oil and gas industry from 2011 through 2015 is associated with a small potential impact on Pennsylvania’s economy and demography. Also, each $100 MM of spending by state and local governments, even if some is deferred, potentially more than makes up for any losses resulting from each additional $100 MM of production costs imposed by a severance tax.
The benchmarks for the potential impact of a severance tax on the Pennsylvania economy are subject to numerous cautions, constraints, and uncertainties, some of which are discussed in this report.
Research report available
Download a copy of the Penn State Institute for Research in Training & Development report, Benchmarks For Assessing the Potential Impact of a Natural Gas Severance Tax on the Pennsylvania Economy, from the Social Science Research Network at:
The intent of the discussion forum offered is to promote dialogue about the assumptions, data, and conclusions offered in the Baker/Passmore report, about viewpoints of a severance tax on natural gas for Pennsylvania, and about the policy issues surrounding the Marcellus Shale development in Pennsylvania. Civil, analytical discussion of these matters is invited by correspondents whose contributions are logged by IP address and are required to be identified by the name of the correspondent. Open, lively discussion is encouraged, but comments judged to be rude, offensive, or attributed to someone other than the actual correspondent are removed from the forum. Correspondents posting to the forum are responsible for the integrity, authenticity, and quality of their own comments.
The views expressed in this document are those of the authors and do not represent beliefs, conclusions, or positions of Penn State or any individuals and organizations consulted during preparation of this report.
This report is issued in the public interest for the benefit of individuals and organizations seeking information about the potential impact of a natural gas severance tax on the Pennsylvania economy. The authors of this report do not represent this information for use in financial planning or investment, nor is any claim made for the usefulness of this information for product design, engineering, or manufacturing.
Conduct, production, and distribution of this report about benchmarking the impact of a natural gas severance tax was not funded by any organization, entity, or individual internal or external to Penn State, other than through allocation of time, effort, and analytical resources by researchers associated with the Institute for Research in Training and Development.
Contacts for the Penn State study of the potential impact of a Pennsylvania natural gas severance tax
Penn State Institute for Research in Training & Development
Mission The Institute for Research in Training & Development is a research group of the Department of Learning & Performance Systems within Penn State's College of Education. The Institute was established by a decision of the Penn State Board of Trustees in the mid-1980s. The Institute is located in J. Orvis Keller Building on the University Park Campus of Penn State (see maps, travel directions, parking, and lodging information). The main point of contact with the Institute for Research in Training & Development is through David Passmore, 305D J. Orvis Keller Building, University Park, Pennsylvania 16802-1303, 814.689.9337, firstname.lastname@example.org.
& independence in the conduct & reporting of research The Institute for Research in Training & Development conducts research that is policy–relevant, but is not policy–prescriptive. The Institute often conducts research and analysis about topics and issues that, at times, are the focus of vigorous debate and public attention and that frequently are associated with diverse stakeholders who represent divergent opinions. The Institute adds value, attention, and discussion to this debate by conducting and reporting research and analysis for decisions affecting economic and workforce development using the most objective and technically appropriate approaches possible. The research and analysis of the Institute are pursued independent of the commercial or political interests of any actual or potential sponsor of the IRTD’s work.