Blog: It's Great to Have Gas

Sharon Ward
Publication Date: 
January 17, 2014

Sharon WardCross posted at Third and State

A new report out from the Mercatus Center at George Mason University gives Pennsylvania low marks for its finances, placing it 42nd nationally in overall fiscal condition and 47th in cash solvency.

The report also provides new evidence that it is great to have gas (and oil) — if you tax it appropriately.

The report should be taken with a grain of salt. It’s a snapshot of fiscal health at a time when states governments are still feeling the effects of the recession. Big recession-related revenue shortfalls and reluctance to impose new taxes have left states in much worse condition than before the recession, despite deep budget cuts in virtually every state.

It should come as no surprise, though, that states with robust severance taxes are doing relatively better. Oil- and gas-producing states were last to fall into recession and first to recover. Gas prices were high through 2009, which kept state coffers flush in Oklahoma, Arkansas, and Wyoming, for example, and higher oil prices and new shale oil technologies have been a boon for Texas and North Dakota since 2011. Alaska always does well because they tax the heck out of oil and gas production.

The following chart shows that state revenues have not yet recovered from the Great Recession.
Percent Change in State Tax Revenue Since Start of Recession, Adjusted for Inflation

Let's take a look at North Dakota now. The state, with a population comparable to that of Bucks County, saw its severance tax revenue increase by $1.3 billion between FY 2011 and FY 2012. That will help any state’s cash position.

Check out this chart comparing states with high rates of budget solvency to the role severances taxes on oil and gas resources play.
In Many States Budget Solvency and Severance Taxes Go Hand in Hand

Some observers will say that Pennsylvania’s poor position is caused by rising retirement costs. It’s not. Virtually every state has a large unfunded pension liability and, according to Paul Volker and Richard Ravitch, the forces behind the State Budget Crisis Task Force, many states shortchanged their pension contributions during the recession when they didn’t have cash, a big factor in the looming pension crisis.

Pennsylvania has two big problems. First, it continued to make big corporate tax cuts even while policymakers were ringing their hands over short-term budget cuts and long-term fiscal liabilities. The value of those tax cuts is now more than $3 billion, 10% of the General Fund budget, and the promised jobs haven’t materialized.

A second problem is Pennsylvania’s flat income tax. States with graduated taxes — higher rates for higher-income earners — have had a cash windfall, as wealthy investors took capital gains in 2012 before the new higher rate set in. Pennsylvania saw some growth, but not as much as in other states. And over the long term, Pennsylvania is unable to capture the income growth of high-income earners, who have pretty much had a monopoly on income growth over the past decade.

Spending isn’t much of a factor. Pennsylvania is pretty much in the middle, according to this survey, which looked at per capita revenue and expenditures. If you look at state spending as a share of the economy, we are pretty steady and below the national average.

Bottom line: Take this report with a grain of salt. States are having a hard time in general and the report captures that. But short-term finances are just that — short-term — and Pennsylvania can take action to improve its position.

The best thing Pennsylvania can do to improve its short-term financial position is to replace the state's local drilling impact fee with a real severance tax. State Representatives Tom Murt and Gene DiGirolamo are proposing a bill that would do just that, at a rate just below that in neighboring West Virginia.