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PA Budget Talks Break Down; No Oil/Gas Severance Tax Imminent

With a deadline fast approaching to pass a state budget, lawmakers in the Pennsylvania General Assembly have reached an impasse, with Republicans advancing their own spending plan that does not include a severance tax on oil and natural gas production, and Democratic Gov. Tom Wolf threatening to veto it.

After Republican leaders in the House of Representatives unveiled a $30.1 billion state budget on Friday with no new taxes or tax increases, Wolf indicated that he would veto the plan completely or elect to use his line-item veto if it makes it to his desk. The Senate is expected to vote on the House's budget by Tuesday, when the state's fiscal year ends and by law a budget must be passed. Democrats, meanwhile, have indicated that they support a veto from the governor, which some Republicans have said they expect.

In February, Wolf proposed a 5% tax on oil and natural gas production in addition to a 4.7 cent/Mcf volumetric fee. His administration estimates that the tax could eventually generate up to $1 billion, most of which would go toward public education in the state and help to shore up a more than $2 billion budget deficit (see Shale Daily, Feb. 11). 

For years, both Republican- and Democratic-controlled legislatures in the state have tried but failed to agree on a severance tax. Instead, in 2012 lawmakers passed an impact fee, which charges a flat rate each year for all eligible unconventional wells in the state, with the revenue allocated to local communities and state agencies (see Shale Daily, Feb. 15, 2012).

Last year, after weeks of debate and a scramble to find revenue for what was then a $1.5 billion deficit, the general assembly once again passed a budget without an oil and gas severance tax (see Shale Daily, July 1, 2014).

It became clear last week that budget negotiations were at loggerheads, with Republicans indicating that they could submit their own budget without the governor's proposals. By Saturday, they had done so, advancing a bill to reform the state's underfunded pension system for state workers and public school employees that found Democrats walking out of a committee meeting.

On Monday, Republicans in the Senate were also working to move to the full floor a bill to privatize the state's 601 liquor stores. Both pension reform and liquor privatization have been long-running priorities for Republicans in the state, but Wolf is opposed to pension reform and favors modernizing, but not privatizing the state's liquor system.

Ahead of the weekend, as lawmakers prepared to work at getting a budget to Wolf's desk, his administration said the House budget included no "real solutions" and was full of "Republican gimmicks." Wolf's budget proposal relied strongly on major tax reforms, including a new severance tax, to fund public schools, provide property tax relief and fix the deficit.

"He has said that anything less is unacceptable," the administration said. "We cannot embrace the status quo of a stagnant economy, multiple credit downgrades and a massive budget deficit."

Democratic House Appropriations Committee chairman Joe Markosek said the Republican budget is full of one-time revenues and said it wouldn't eliminate or reduce the state's current deficit. Democratic House Whip Mike Hanna said "Pennsylvanians have made it crystal clear" that "they need a budget that makes education a priority and makes gas drillers pay a fair share."

The oil and gas industry has launched an aggressive campaign in recent months to stave-off a new severance tax, with advertising, press conferences and opinion pieces in newspapers across the state. Speaker of the House Mike Turzai said the Republican budget is "pro-jobs," adequately funds education and provides measures that modernize the state through liquor and pension reforms.

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