The Philadelphia Inquirer ran a terrific story yesterday on how state taxation really works. This summer, Pennsylvania Governor Ed Rendell said he wanted to tax natural gas as it was extracted from a black rock reservoir known as Marcellus Shale. The state needed the money and it seemed like a prudent thing to do. After all, every state with significant natural gas resources imposes severance taxes on their extraction. But when the dust settled on the Pennsylvania budget, the natural gas companies escaped taxation all together. What happened? Rendell says that he thought more about it and decided that he did not want to slow "the rush" of development and job creation. But most Democratic legislators know the truth. The natural gas companies lobbied their way to tax freedom.

There is a boom going on in Pennsylvania as the natural gas industry has been securing leases and drilling. Rendell originally wanted to tax the gas like neighboring West Virginia at a 5 percent tax on the value of natural gas at the wellhead, plus 4.7 cents per 1,000 cubic feet of natural gas extracted. The Rendell administration thought such a tax could raise $107 million for Pennsylvania in its first year. Turns out that the money men behind the gas industry were big contributors to Democratic Governor Rendell. Those same men poured $1 million into a lobbying campaign this summer to convince legislators that the severance tax would kill the industry. The industry then paid researchers at Penn State to "find" that a severance tax would have a negative impact on the economy. Yet, no other state imposing a severance tax on natural resources has suffered as a result. The best part of the story is that the industry has already formed political action groups to support candidates for the next governor's race.