Senate Committees Weigh Severance Tax Impact

Jun 10, 2015

In this June 25, 2012 file photo, a crew works on a gas drilling rig at a well site for shale based natural gas in Zelienople, Pa.
Credit AP Photo/Keith Srakocic, File

Gov. Tom Wolf argued last week that taxing Pennsylvania’s booming natural gas industry could help compensate for an anticipated $1 billion structural budget deficit in 2016.

His budget includes a state severance tax of 5 percent on extractions based on the value of gas at the well head and a charge of 4.7 cents per thousand cubic feet extracted. The commonwealth produced 3.23 trillion cubic feet in 2013.

The tax would also set a floor of almost $3 per thousand cubic foot regardless of the price gas is selling for, meaning drillers could pay more to the landowner than he or she receives when prices wane.

Most production states have a severance tax, and proponents say the state must be compensated. Opponents like Sen. Camera Bartolotta (R-Carroll) disagree.

Another tax will drive away drillers, she said.

“Taxing an industry that is already laying off workers by the hundreds because their product is so cheap at the moment that they’re not realizing the return on investment they once had, they’re going to be reinvesting their capital elsewhere,” Bartolotta said.

State Independent Fiscal Office Director Matthew Knittel said during a joint hearing of the Environmental Resources and Energy and Finance committees that after all taxes are accounted for, producers would pay 2.3 percentage points more than West Virginia and 4 percentage points more than Texas.

“The proposed severance tax will likely move Pennsylvania from one of the lowest severance tax states to the highest tax state relative to other major gas producing states," Knittel said. "Over several years, economic theory suggests that most of the tax will be pushed forward to final prices, and output will fall by some amount.”

The Wolf administration estimates the tax will generate more than a billion dollars in Fiscal Year 2016-17. But after Secretary of Revenue Eileen McNulty gave her testimony at the most recent committee hearing, Sen. Gene Yaw (R-Williamsport) said the industry was already paying a specialized tax.

“I hear this repeatedly that Pennsylvania is the only state that doesn’t have a tax on natural gas. What’s the impact fee? Isn’t that a tax? It’s generated about $800 million over the last four years.”

In 2012, the General Assembly voted down a severance tax and enacted an impact fee instead. The Public Utility Commission distributes annual impact fees to local governments hosting unconventional gas wells, or fracking. The fees can be used in 13 categories, including repairing roads and sewer systems and creating affordable housing.

The Independent Fiscal Office says the effective tax rate for the fee has been as low as 2 percent, but is at 4.7 percent in 2015.

A portion of the severance tax revenue would continue to go to municipalities, and a promised $10 million will provide for additional oil and gas enforcement officers to monitor air and water quality. The Wolf administration insists most of the money would go toward education -- about $2 billion in the next four years.

David Spigelmyer, president of the Marcellus Shale Coalition, said the argument that residents are either for a higher energy tax or against education is unfair. He said thousands of jobs will be lost and companies will move to neighboring states.

“The proposals being made that are in Harrisburg today by the Governor’s office would place Pennsylvania at a deeply competitive disadvantage to other areas … where capital is being invested for shale gas development,” he said.

Michael Wood, research director for the Pennsylvania Budget and Policy Center, said gas companies have been making excuses for years.

“Originally it was it is an infant industry that would need to be protected, then it was this promise of jobs that we were supposed to see coming from the industry – we’ve seen the number of jobs plateau," he said. "The next one was going to be energy dependence. We couldn’t tax this because it would make people’s rates increase, and the new one is current low prices.

"We acknowledge that there are low prices, but the industry will claim to lawmakers that they have this claim of poverty, that they can’t possibly afford it because the prices are so low,” Wood said.

Lawmakers have three weeks to finalize a state budget.