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NatGas Tax Back on Table in Pennsylvania As Another Bill Advances

It remains unclear if legislation to enact a severance tax on unconventional natural gas production that cleared the Pennsylvania House Finance Committee this week has enough support to pass the Republican-controlled chamber.

HB 1401 also includes another thorny proposal for the industry that would require producers to guarantee a minimum 12.5% royalty to landowners in the state, effectively limiting the controversial post-production charges that have been deducted from checks to cover things like dehydration and transmission.

Democratic Gov. Tom Wolf, who has proposed a severance tax three times since he took office in 2015, urged House leadership to bring the severance tax legislation to a vote on the floor, saying it’s a “commonsense proposal that will address our structural budget deficit.”

The chamber isn’t scheduled for a voting session until Monday. House Republican spokesman Stephen Miskin said the leadership remains opposed to an extraction tax, as the majority of the caucus likely does too, but he added that ultimately “we don’t know, we may find out.”

Miskin said he has no idea if the legislation will be brought for a vote before the full House next week. For now, the bill is working its way through the legislative process, with more amendments likely.

“I wouldn’t call it an anomaly,” he said of the finance committee’s 16-9 vote in which six Republicans joined Democrats to approve the bill. “There’s no more support for it now than there has been in the past. All the [Republican] leaders believe a separate severance tax is the wrong the direction.”

The legislation, sponsored by Bucks County Republican Rep. Gene DiGirolamo, who hails from southeast Pennsylvania where there is no shale drilling, would keep in place the state’s impact fee. The bill proposes a volumetric tax that would follow the market and charge 2 cents/Mcf when prices are below $3 and increase to a maximum of 3.5 cents if the market price is higher than $5.99.

While low by the standards of some other states, the industry has resisted calls for a severance tax for years. Natural gas producers have paid more than $1 billion in impact fees since the payments became law in 2012. They are levied annually on unconventional wells with the funds by-passing the state treasuryand distributed to local communities and state agencies. Marcellus Shale Coalition President David Spigelmyer decried HB 1401, again claiming a severance tax would hurt the state’s competitive edge and economy. 

The industry continues to maintain that it pays more than its fair share with the impact fee, arguing that it earns among some of the lowest natural gas prices in the country, which push up its effective rates.

But four months into yet another state budget impasse, the chorus to pass an extraction tax has grown even louder. DiGirolamo said in a statement that the finance committee’s vote marked a “monumental step forward in making sure that the industry pays its fair share and ensuring that we have a way to raise recurring revenue for important programs, such as human services and education.”

The legislation was drafted for the state’s tax code, unlike previous bills that were drafted to be part of the oil and gas code. Those bills land in the House Environmental Resources and Energy Committee. Miskin said as far as he knows that similar legislation has never come out of the finance committee. Republicans have staunchly resisted implementing a severance tax for years, handily voting down similar legislation on the floor in the past.

HB 1401 comes as the state faces a more than $2 billion budget deficit. While the legislature passed a $32 billion budget in July, it has fought for months about how to fund it.

The Republican-controlled state Senate passed a revenue package over the summer to tax shale gas producers 2 cents/Mcf this fiscal year and possibly more after that. That plan included other tax increases as well and was rejected by the House, which came back with its own no-tax proposal. After the Senate balked at that, it was back to the drawing board, and the House unveiled yet another revenue package this week that the Senate has yet to commit to.

The House’s latest overall proposal does not include a severance tax. It would instead rely on borrowing, a gambling expansion and one-time special fund transfers to help plug the budget gap. 

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