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Industry Keeps Up Fight as Possible Pennsylvania NatGas Tax Lingers

Another voting session came to an end in the Pennsylvania General Assembly on Thursday with no action on the latest severance tax legislation for unconventional natural gas production.

A nearly four month budget impasse, however, came to an end with legislators sending a revenue package to Gov. Tom Wolf for a signature that would fund the $32 billion budget passed in July. Wolf has 10 days from the time legislation reaches his desk to decide what to do with the bills. While another fiery debate about passing a severance tax played prominently in the latest budget spate, it wasn’t included.

The legislature won’t reconvene until Nov. 13. The latest severance tax bill, HB 1401, which cleared the House Finance Committee earlier this month with bipartisan support, will be awaiting lawmakers when they return, and the industry continues to lobby against it.

“It’s well past the time for an honest discussion about a Pennsylvania severance tax,” wrote Dan Weaver, executive director of the Pennsylvania Independent Oil and Gas Association, in a recent letter to Republican and Democratic House leaders. “Now that severance tax supporters are closer than ever to getting their wish in the form of HB 1401, it’s time to be honest about why this is the case -- simply to fulfill the governor’s signature campaign promise and help to get him reelected.”

Lawmakers have tried but failed for years to reach a compromise about the severance tax. Despite passage of an impact fee in 2012, which is levied annually on most unconventional natural gas wells for distribution to local communities and state agencies, the debate has raged on. Proposals have come closer in the past, with bills stalling in one chamber after passing in another, or with floor votes widely defeated.

HB 1401 emerged from the finance committee because it is drafted to be part of the state’s tax code and not the oil and gas code as other bills have been. Republican leaders remain staunchly opposed to a severance tax, and the latest bill hasn’t been brought to the Republican-controlled House floor for debate since it cleared committee.

Weaver outlined the “false premises” severance tax proponents have pushed to help support it. The notion that natural gas producers don’t pay their “fair share,” he wrote, is outrageous, considering they pay all the same taxes that other businesses do, while also incurring the impact fee. The idea that the state general fund has not benefited meaningfully from shale development, Weaver said, is also false, as he noted that most of the natural gas produced comes from privately owned resources for which owners are compensated.

Neither international, nor national markets -- as some tax proponents have suggested -- set local natural gas prices, Weaver pointed out, reminding the leadership that “gas-on-gas competition among Appalachian producers that bid against each other to sell gas at the lowest” cost  has pushed down prices and driven up operators’ effective tax rates.

Wolf is up for reelection next year, but the severance tax has been a popular proposition in statewide polls. The governor made the issue a central part of his campaign in 2014. During a brief stop in Philadelphia on Thursday, Wolf again called on House Republicans to pass a severance tax.

The GOP-controlled Senate passed a revenue package over the summer as part of budget negotiations that included a proposal to tax shale gas producers 2 cents/Mcf this fiscal year and possibly more after that. The House shut the proposal down, and the chambers went back and forth for months before eventually settling on Thursday’s package. It leans heavily on borrowing, one-time fund transfers and an expansion of gambling to help plug a $2 billion-plus deficit.

HB 1401 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.

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