Unconventional energy, taxation, and interstate welfare: An analysis of Pennsylvania's severance tax policy

Natural gas production from unconventional sources has increased over the past decade. A significant portion of this increase has come from output in the Marcellus region of Pennsylvania. This output has altered gas markets and repositioned Pennsylvania as a major gas exporter. It has also put Pennsylvania at odds with other states as it is one of a few without a formal severance tax on extractive resources. In this paper, we combine results from a structural demand model with a two-sector trade model to analyze the interstate welfare impacts of Pennsylvania's current severance tax proposal. Our results demonstrate that most of the welfare losses from this proposed policy are likely to be shifted to residents in other states. We also demonstrate how fluctuations in gas prices can substantially reduce tax revenue. These findings have important implications for both Pennsylvania and U.S. energy policy given the significant rise in energy production from new sources throughout the U.S.