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Setting Stage for '15, PA Severance Tax Proposals Pour In

Proposals to raise more fees against Pennsylvania's natural gas industry are pouring in ahead of the 2015-2016 legislative session, with three put forth in the last week alone aimed at shoring up the state's nearly $2 billion budget deficit.

Republican state Rep. Kate Harper, who represents southeast Pennsylvania's Montgomery County, said late last week that she was seeking co-sponsors for a bill that would establish a severance tax on oil and gas extraction that would be paired with the state's existing impact fee.

The General Assembly reconvenes on Jan. 6, ahead of Democratic Gov-elect Tom Wolf's inauguration on Jan. 20, for what's anticipated to be some of the fiercest debate yet on the role of a natural gas severance tax in generating enough revenue to cover escalating state spending. Wolf ran on a popular pledge to tax the industry at a rate of 5%, which he claimed could raise as much as $1 billion (see Shale DailyNov. 5Oct. 31May 21). Such a proposal is widely expected to be included in his first proposed budget, due in March.

Harper is the latest to put forward the idea of another fee on the industry. Last week, before her proposal was floated in a memo to lawmakers, a Democratic senator from southwest Pennsylvania announced a plan to earmark revenue from a new severance tax for the state's underfunded public schools and retain the impact fee for an effective 5% tax rate. At the same time, two lawmakers from the other side of the state said they would try again for a new impact fee on natural gas gathering and transmission pipelines (see Shale DailyDec. 18).

Harper said she plans to introduce her legislation in January. It would call for a 3.5% tax based on wellhead prices that she said could generate as much as $400 million when combined with the impact fee.

"As this industry continues to grow, we have an opportunity to generate much-needed revenue to meet the ongoing economic challenges facing our state," Harper said. "My proposal strikes the appropriate balance between keeping this job-creating industry competitive and capitalizing on the opportunity to protect our school taxpayers from skyrocketing pension costs."

Republican Gov. Tom Corbett, who lost his reelection bid to Wolf in November, had tried but failed for years to address the state's underfunded pension liabilities for state workers and public school employees (see Shale DailyJune 17). According to the state budget office, those two funds have an unfunded liability of $47 billion, which Corbett and others have claimed are a large part of the state's budget woes.

Harper's plan would direct revenue to the public school retirement system, which she said accounts for $32 billion of Pennsylvania's pension liabilities. Pension reform and privatizing the state's liquor stores have been put forth as other ways to reduce the state budget deficit.

It remains unclear if Wolf plans to pair a severance tax with the existing impact fee, which charges a flat rate for all wells drilled in the state each year no matter how much gas is produced. Since it was passed in 2012, the impact fee has generated more than $630 million in revenue for local communities and state agencies (see Shale DailyApril 4).

Depending on the value of gas, the impact fee amounts to an effective 2% tax rate, and Harper claims that when combined with her plan, the rate would be near 5%, keeping Pennsylvania competitive with nearby shale-producing states such as West Virginia.

Although she noted that Wolf's revenue estimates are likely too high and said a severance tax would have to be seriously considered at some point, the oil and gas industry remains largely opposed to any new tax, with industry representatives saying last week that there's no room for compromise on the issue (see Shale Daily,Dec. 17).

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