Pennsylvania is the only large oil and gas producing state that has no severance tax, but it may be on the verge of enacting one. 

            What is a severance tax?  A severance tax is a tax imposed on the removal of non-renewable resources such as crude oil, condensate and natural gas, coalbed methane and carbon dioxide.  A severance tax is charged to producers, or anyone with a working or royalty interest in oil or gas operations in the imposing states.  Investopedia.

            For years a severance tax has been proposed in Pennsylvania; however, it has never gotten past the Republican controlled legislature.  This year, however, may be different. 

            Pennsylvania is required by its constitution to have a balanced budget.  The Republican controlled legislature passed the budget, but provided no funding for it.  Governor Tom Wolf allowed the budget to go into law without signing it.  Now, the legislature is scrambling to enact funding.  One of the items proposed is a severance tax.  The tax has passed the Senate.  It now goes to the House for consideration, where it is expected to have a difficult time passing. 

            If a severance tax is imposed, who will be responsible for paying it?  Will it be the oil and gas company or the royalty owners?

            In numerous oil and gas leases, in fact, in virtually all of the oil and gas leases that I have reviewed, the leases provide that the royalty owner is to pay a share of the severance tax along with other taxes.  Despite efforts to remove this provision, oil and gas companies normally insist that this provision remain in the oil and gas lease.

            If Pennsylvania does enact a severance tax, the tax will fall not only on the oil and gas companies, but, in addition, it will fall on those royalty owners who have leased their oil and gas rights.  While a severance tax may help balance Pennsylvania’s budget, it will, nevertheless, take money out of the royalty owners’ pockets as they will be responsible for paying their share of the severance tax.  If you are living in Pennsylvania and have an oil and gas lease that provides that you are to pay a portion of any severance tax imposed, you may want to contact your state representative in order to express your opposition.