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PA Fiscal Office Again Says Proposed NatGas Tax Would Set Nation's Highest Rate

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

Wolf's 2017-2018 budget plan calls for the severance tax. It is the third time he has asked lawmakers to consider it. Like last year's proposal, shale producers would be able to take a credit against the severance tax for the impact fees they already pay. The fees have generated more than $1 billion for local communities and state agencies.

In an analysis of Wolf's proposed revenue sources the IFO found that if a severance tax is enacted this year, producers would pay an effective rate of 9% on their natural gas volumes. The IFO essentially said the same in last year's analysis. The only state that comes close is West Virginia, with a 5% effective rate, according to current projections. Lawmakers there eliminated a volumetric fee on natural gas production last year.

The Marcellus Shale Coalition said Wolf's proposal would be a "job-crushing tax burden" that "would restrict energy production" in the state. The trade group said the IFO's "research should send off alarm bells to policymakers in Harrisburg." The Wolf administration could not be reached to comment about the analysis on Thursday.

The IFO's estimates are based on the projected market value of natural gas using prices from the Dominion South and Leidy trading hubs. The estimates also include natural gas production projections. During fiscal year (FY) 2018-2019 -- the first full year a severance tax would be in effect -- the IFO said the state could generate $712 million under Wolf's proposal if more than 5 Tcf is produced. That would grow to nearly $2 billion in revenue during FY 2021-2022 at around 7 Tcf of production, according to the IFO's projections.

The analysis also noted that while "producers are liable for the proposed severance tax, others will generally bear the tax burden through lower royalty payments or higher energy prices."

Lawmakers in the state have tried but failed for years to agree on a natural gas severance tax. Wolf proposed a $32.3 billion budget in February that included the severance tax proposal to help plug a projected $3 billion budget deficit next fiscal year, which begins in July.

The Republican-controlled House of Representatives passed its first version of the state budget this week, approving $31.5 billion in spending. The plan does not include a severance tax or any other tax increases. It relies instead on spending cuts, setting the stage for what's likely to be months of negotiations with Wolf and Democratic lawmakers.

Wolf is not alone in his efforts to raise revenues from the region's abundant natural gas production. Ohio Gov. John Kasich, a Republican, renewed his call for a 6.5% tax on unconventional oil and gas production earlier this year. Producers in Ohio enjoy one of the nation's lowest severance taxes, where they pay 2.5 cents/Mcf for natural gas and 20 cents/bbl of oil.

Kasich has repeatedly called for an increased severance tax during his time in office, but members of his own party, which controls the state legislature, have balked at those proposals.

The Pennsylvania IFO offers non-partisan revenue projections for use in the state budget process. It also analyzes other fiscal, economic and budgetary issues that help lawmakers and residents evaluate policy decisions.

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