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Pennsylvania Governor’s Severance Tax Proposal Could Set Highest Rate in Nation

Pennsylvania's Independent Fiscal Office (IFO) said this month that Democratic Gov. Tom Wolf's latest proposal to enact a 6.5% severance tax on natural gas production would give the state the highest effective rate in the country.

In an analysis of the 2016-2017 executive budget proposal released last week, the IFO said Wolf's plan to impose a 6.5% rate at projected regional prices ranging from $1.37/Mcf to $3.71/Mcf from 2016 through 2021 would lead to an effective rate of 8.5%. Wolf wants to keep the state's impact fee and allow producers a credit for those fees that would reduce their severance tax payments. But the IFO said keeping the impact fee would push the effective rate higher.

The impact fee is charged for all unconventional wells during their first 15 years in operation, regardless of how much they produce. IFO said its market value, or tax base, was estimated by multiplying forecasted unconventional gas well production by the spot price at regional hubs such as Leidy and Dominion South. Wolf's proposal would not allow a deduction for post-production costs. Projected tax collections included in the analysis were determined by applying the 6.5% rate to the tax base and deducting the impact fee credit.

If passed, only Oklahoma would have an effective rate anywhere near comparable at 5.4%, according to the IFO's calculations.

"The most recent IFO report further demonstrates that Gov. Wolf's energy tax increase proposal would make Pennsylvania the highest natural gas taxed state in the country, with a tax rate at a whopping 54% higher than top gas producing states -- Texas and Louisiana," said Marcellus Shale Coalition (MSC) President Dave Spigelmyer. "Given the ongoing market challenges that have led to deeply painful job and investment cuts that are impacting countless Pennsylvanians, there couldn't be a worse time for new and even higher energy taxes."

The MSC said that according to the IFO's estimated market prices, Pennsylvania producers receive only 61% of what their competitors are receiving in other basins across the country. Wolf unveiled his latest severance tax proposal in February, when he released his $32.7 billion budget for 2016-2017 (see Shale DailyFeb. 9). In 2015, he had proposed a 5% severance tax plus a 4.7 cent/Mcf volumetric fee. He later scaled that plan back to 3.5%, including the volumetric fee, in an effort to increase support for the proposal (see Shale DailyOct. 7, 2015).

It was only in March that the state passed its 2015-2016 budget after a nine-month impasse marked by early gridlock over the severance tax proposal, which was strongly opposed by the industry and Republican lawmakers (see Shale DailyMarch 23). But Wolf has said it is imperative that the state generate new revenue streams to cover mandatory costs and fill a $2 billion budget deficit that he inherited. 

“The Independent Fiscal Office’s calculations create an inaccurate picture of the tax burden on natural gas drillers by failing to include other taxes paid elsewhere, which are not paid in Pennsylvania,” said Wolf spokesman Jeffrey Sheridan.

According to the administration, an analysis by the state Department of Revenue found that in 2013 -- the most recent year for which full data is available -- oil and gas producers paid only $36.6 million in Pennsylvania taxes. Sheridan said in Texas, for example, the industry paid nearly $14 billion in total taxes in 2014.

“By ignoring the actual taxes which will be paid by the industry, the IFO presents an incomplete picture of the relative tax burden under the governor’s proposed severance tax,” he said.

The IFO said new consumption, sales, severance and personal income taxes, among others, would lead to a $3.6 billion general fund revenue increase by 2020-2021 under Wolf's plan. It estimated that the severance tax, if enacted, would generate $517 million of net tax revenue in 2017-2018, its first full year in effect. That would grow to $968.5 million by 2020-2021. 

The Wolf administration has estimated that the 6.5% rate would generate $350.9 million in revenue if enacted in 2016-2017, with a projected $133.1 million credit for the impact fee. That would bring estimated revenue in at $217.8 million during the first partial year of collections, according to the administration.

By law, the state must pass a budget by July 1. The IFO based its calculations on a July 1 effective date, with collections beginning in November. 

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