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Cash-strapped States Weigh Tax Policy On Drilling

At least 36 states impose some sort of severance tax on oil, gas, coal, timber and minerals, generating more than $11 billion in revenue in 2010. Of those, 31 states levy severance taxes specifically on production of oil and gas, according to the legislative conference.

Pennsylvania is the only state that's part of the recent Marcellus and Utica boom that imposes no production tax. For now, state lawmakers have opted for an impact fee based mostly on the number of wells. Proceeds are targeted toward boosting regulation and repairing or upgrading roads and bridges around burgeoning well sites.

Of the first $202 million that Pennsylvania collected since approving the impact fees in February, the state gets $23 million off the top and $107 million is being split among 37 counties and some 1,500 municipalities hosting gas well. The remainder is ticketed for state regulatory agencies.

West Virginia also opted to increase permit fees rather than raise its severance tax.

Proponents of the production tax approach, including Kasich, argue that taxes on the extracted oil, natural gas and natural gas liquids can bring long-term benefits to state economies that impact fees can't. Once the resources are tapped and well construction is completed, wells could continue producing for half a century, according to some experts.

The Pennsylvania Budget and Policy Center, a liberal think tank, estimated the state lost $300 million between October 2009 and January by not passing a proposed tax on oil and gas production.

Kasich's tax plan is similarly stalled, as fellow Republicans who lead the Legislature grapple with the political fallout.

Though the national Americans for Tax Reform has sanctioned Kasich's plan as compatible with its anti-tax hike pledge, that doesn't mean the well-funded energy industry couldn't run ads against lawmakers who support the increase when they come up for re-election in two years.

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