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As Pennsylvania Budget Negotiations Near, Severance Tax Divide Widens

In his first address to a joint session of the Pennsylvania General Assembly, Democratic Gov. Tom Wolf outlined a 2015-2016 state budget replete with tax reform that leans, in part, on the natural gas industry to plug a $2.3 billion budget deficit.

Even as Wolf, who took office in January, was delivering his speech, the state's leading oil and gas trade groups were issuing statements denouncing the plan. While on Monday, Republican state House of Representatives Speaker Mike Turzai openly rejected Wolf's calls for a new severance tax on the industry, telling reporters during a press conference that the Republican-controlled legislature was "not there yet" on a compromise for the tax.

"As you know, I campaigned on the idea that we need a new approach to governing Pennsylvania -- one that challenges the status quo and takes on old problems in fundamentally new ways," Wolf told lawmakers during his address on Tuesday. "And one of the old problems we need to put to rest is the idea that Democrats and Republicans can't work together to solve Pennsylvania's problems."

Wolf has met with nearly every member of the state legislature over the last two months. A poll released by Robert Morris University of 508 Pennsylvanians on Monday found that about 57% have a favorable view of the new governor. But as earnest budget negotiations are set to begin in the coming weeks, the divide over the severance tax appears to once again be widening (see Shale Daily, Jan. 28, 2014) .

"More growth means more jobs and more revenue; higher taxes mean driving development away from Pennsylvania, costing jobs and the loss of revenue, which can pay for education, transportation, healthcare and other state programs," said API-Pennsylvania Executive Director Stephanie Catarino Wissman. "The governor should focus on choosing forward-looking pro-energy policies that will continue to benefit the commonwealth and its citizens."

Last Month, Wolf outlined a severance tax proposal that calls for a 5% flat rate multiplied by the market value of gas in addition to a 4.7 cent/Mcf volumetric fee (see Shale Daily, Feb. 11, 2015). A staple of his budget is reinvestment in public education through the restoration of $1 billion in cuts that were made by former Gov. Tom Corbett. Wolf said again on Tuesday that the severance tax could generate up to $1 billion in its first full fiscal year beginning in 2017, which starts July 1, 2016.

"This is not a partisan idea," he said. "This is recognition that Pennsylvanians are getting a bad deal. We deserve to be fairly compensated for the use of our resources. The benefits of this change don't end there, either. By shifting the cost of public education away from local districts, we are also going to drastically reduce property taxes."

Wolf's budget includes an average of more than $1,000 of tax relief for homeowners, reducing school district property taxes by more than 50%. He was also more direct in saying Tuesday that "impact fee dollars are preserved and will continue to support communities where drilling takes place."

In lieu of a severance tax, Pennsylvania charges a flat fee for wells in the state each year no matter how much gas is produced. The money is distributed to local communities and state agencies. The fee has generated more than $630 million since it was enacted in 2012, and local governments have expressed concern about losing some of those funds with a potential severance tax tied to education (see Shale Daily, April 4, 2013; Feb. 15, 2012).

Wolf said $225 million in revenue from the tax would be preserved to assist local communities, which is roughly what the impact fee has generated annually. The severance structure combined with regional gas prices would put his proposal’s effective rate at about 5.8%. Trade groups, however, have said that volatile gas prices in the region would put it closer to 8% for some producers in the state.

Last week, the Pennsylvania Independent Fiscal Office said rising Marcellus Shale production, combined with price volatility, has led to a decrease in the impact fee's effective rate from 5.3% in 2011 to 2.1% in 2014. An industry-backed poll of 804 Pennsylvanians released last week also found that 49% are in favor of a severance tax, but that number decreased to 29% if the tax were to result in job losses.

"Enacting another tax on natural gas development as a means to fix a budget shortfall is the wrong path forward for Pennsylvanians," said America's Natural Gas Alliance. "With the benefit of a policy environment that has encouraged economic development, the natural gas industry has helped create good-paying jobs, lowered energy bills and delivered unprecedented economic opportunity."

The industry has also paid more than $2.1 billion in state taxes, including the corporate net income tax. Wolf said his budget would cut the current corporate rate of nearly 10% to about 5% by 2018 and eliminate loopholes that he said allow companies to avoid payments.

"That is driving jobs out of our state," Wolf said of the corporate net income tax. "At the same time, loopholes in that tax code allow many companies to avoid paying state income taxes altogether. Because of these loopholes, more than 70% of companies that do business in Pennsylvania do not pay corporate net income taxes at all."

The plan would also shift the tax burden to some individuals. Wolf proposed increasing the state's personal income tax from 3.07% to 3.7%, while also proposing an increase in the sales tax from 6% to 6.6%.

Democratic state Sen. John Yudichak, who serves as the minority chairman of the Senate Environmental Resources and Energy Committee, called Wolf's plan a "comprehensive modernization of the tax code that would end loopholes for special interest groups." The state's next fiscal year begins July 1, giving lawmakers roughly four months to pass a budget.

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