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Making Sense of the Pennsylvania Tax Proposals

As the summer recess approaches, Pennsylvania is flooded with proposals to tax the Marcellus Shale industry.

The General Assembly is currently considering eight bills that would impose a tax or fee on natural gas production, and in recent weeks another five lawmakers have announced plans to introduce fees or taxes.

The sheer number of proposals and the nuances of each one show that lawmakers are looking for a way to meet the growing public demand for the state to collect revenue from the natural gas industry, while also acknowledging the political reality that Gov. Tom Corbett refuses to approve a tax increase of any kind, according to Michael Wood, a research director with the Pennsylvania Budget and Policy Center (PBPC) (see Shale Daily, March 18).

"They've been trying to find a way to do something that is palatable to the governor," Wood told NGI's Shale Daily.

The PBPC recently analyzed seven proposals, comparing everything from the effective tax rate to the projected revenue each would generate, to the way each would direct that revenue. For its comparison, the PBPC assumed that 9,480 wells would be in operation in Pennsylvania by 2015, each producing 3.8 Bcf over its life at constant price of $4.28/Mcf, the metrics used in one piece of legislation.

The General Assembly began considering a tax on natural gas production several years ago as development of the Marcellus grew, but the issue reached a legislative apex in late 2010 when then-Gov. Ed Rendell, a Democrat, endorsed a proposal that passed the House but stalled in the Senate just before mid-term elections brought Republican Gov. Tom Corbett and a wave of Republican lawmakers into office (see Shale Daily, Oct. 22, 2010).

The majority of the proposals this year have come out of Southeast Pennsylvania, the heavily populated area around Philadelphia that is also the largest section of the state not underlain by the Marcellus Shale Formation.

"There is bi-partisan support for some sort of tax on drilling. Reading the tea leaves, we think it is going to happen in some form," PBPC Communications Director Christopher Lilienthal said, adding that the ultimate version of the tax might not come about until the fall and might be an amalgamation of several current proposals.

The first three bills, all introduced in early February, sought to replicate that failed 2010 bill.

House Bill 33, introduced by state Rep. Greg Vitali, a Philadelphia-area Democrat, would levy a 5% tax on the gross value of natural gas plus an additional 4.6 cent/Mcf produced, aiming to raise $167 million in 2011 and $552 million by 2015. That revenue would go to the general fund, environmental programs and local governments. The bill would exempt wells producing less than 60 Mcf/d from the tax.

HB 33 is currently in political deadlock. When it failed to move out of committee after several months, Vitali attempted a procedural maneuver to send it to the House floor for a vote but failed (see Shale Daily, Feb. 15).

The left-leaning but nonpartisan PBPC generally supports House Bill 33, saying it competes against the tax in neighboring West Virginia while delivering the most revenue to both local governments and the general fund, but Wood said the PBPC is more supportive of a severance tax in general than any specific proposal.

Senate Bill 352, introduced by state Rep. Andrew Dinniman, also a Philadelphia-area Democrat, proposed an identical tax structure to HB 33 but did not include the low-producing well exemption or fund local governments.

House Bill 833, introduced by state Rep. Camille "Bud" George, a Democrat from central Pennsylvania, would levy a 30 cent/Mcf tax on wells producing more than 60 Mcf/d, adjusted based on commodity prices.

The tax would raise $234 million in 2011 and $774 million by 2015. That revenue would be split between local governments (35%), infrastructure projects (30%), environmental programs (15%) and other restricted accounts, but would not add to the general fund. The bill also includes a $25 million annual tax credit for local job creation.

In May state Sen. Jim Brewster,a Democrat from southwest Pennsylvania, announced plans to introduce a 7% tax to fund education, environmental programs and local infrastructure projects. The bill is also based on the failed 2010 effort but would add a tax credit for companies that hire local and invest in community projects. Brewster estimated that the bill would raise $280 million per year (see Shale Daily, May 11).

In late March, two Senate Democrats introduced alternatives to those bills.

State Sen. Jim Ferlo of Pittsburgh, proposed a 24 cent/Mcf tax on wells producing more than 60 Mcf/d, a rate adjustedannually based on commodity prices. The tax would bring in $125 million in 2011 and $609 million in 2015 and would split that revenue evenly between environmental programs, local governments and recovery efforts.

The bill would also update the Oil & Gas Act to toughen regulations (see Shale Daily, May 13). Ferlo is one of the leading critics of Marcellus development in the General Assembly and supports a moratorium on drilling.

State Sen. John Yudichakof northeastern Pennsylvania introduced Senate Bill 905, a 2% tax on the gross value of natural gas during the first three years of production that increases to 5% thereafter for wells above 150 Mcf/d. The bill would exempt wells producing less than 90 Mcf/d from the tax.

The proposal is estimated to raise $69 million in 2011 and $318 million in 2015, revenue distributed evenly between environmental programs, local governments and financing for water and sewer projects across the state. The bill gained early attention for receiving rare bi-partisan support.

So did House Bill 1406,introduced in late April by state Rep. Kate Harper from the Philadelphia-area. The bill proved notable for being the first severance tax measure brought forward by a Republican in the House.

Based on the fiscal system in Arkansas, the bill would levy a 1.5% tax on the gross value of natural gas during the first five years of production for wells producing more than 90 Mcf/d, rising to 5% thereafter. The bill would bring in $50 million in 2011 and $204 million in 2015, and that revenue would be split almost evenly between local governments, environmental programs and education, an area facing a $1.5 billion cut in the Corbett's budget.

Responding to several speeches where Corbett re-iterated his pledge not to sign any bill that raised taxes, the legislative proposals introduced in May and June aim to increase revenue without increasing taxes.

Senate President Pro Tempore Joe Scarnati, a Republican from north central Pennsylvania, introduced an "impact fee" in May. The proposal would impose a $10,000 fee per well per year, an amount that could increase to $25,000 in the early years of production depending on natural gas prices and production levels. Unlike most other proposals that begin collecting in mid-2011, the impact fee would collect retroactively from 2010 (see Shale Daily, April 29).

The fee would not be assessed on wells producing less than 60 Mcf/d. The fee would bring in $122 million in 2011 because of those back payments, and $172 million in 2015. That money would be directed entirely to local projects, with 60% for governments and the rest for infrastructure.

State Rep. Jim Marshall, a Republican from southwestern Pennsylvania, recently introduced a companion bill.

State Rep. Marguerite Quinn, a Republican from southeastern Pennsylvania, said last week that she will introduce an alternative fee, the Shale Impact Mitigation Policy for Local, Environment and Roads (SIMPLER). Although no language is available, Quinn said the bill would impose a "graduated" fee based on the production curve of each well.

Quinn did not provide a revenue projection for SIMPLER but said that the fee would bring in more money than many tax proposals. Of the revenue collected from the fee, half would go directly to local governments and the rest would go to environmental programs (25%), roads and bridges (20%) and county conservation districts (5%).

Also last week, three Philadelphia-area Republicans announced plansto introduce separate taxes that would keep Pennsylvania revenue neutral by using the money to offset property taxes and personal income taxes.

State Senate Majority Leader Dominic Pileggi wants to create a "reasonable and competitive tax" on natural gas production to freeze school property taxes for senior citizens. Although Pileggi has yet to present the specific details of his proposal, he said his severance tax would be a "fixed rate" on both the volume and price of natural gas, and would bring in around $250 million per year for the next five years at current prices. Pileggi said his bill should co-exist with an impact fee to help local governments.

State Rep. Nick Miccarelli wants to use the natural gas industry to lower state personal income taxes by imposing a 3% tax that would jump to 5% after two years of production. He estimated that his bill would raise $1.1 billion cumulatively by 2015 and lower the state personal income tax to 2.99% from its current rate of 3.07%.

Last Monday state Rep. Robert Godshall proposed a tax that is similar in structure to Harper's -- 1.5% of the gross value of natural gas at the wellhead during the first 60 months of production and 5% thereafter for wells that produce more than 90 Mcf/d -- but would lower property taxes only for certain low income senior citizens.

The Pennsylvania General Assembly is a full time legislature that meets for two-year cycles.

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