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Governor Shelves Pennsylvania Severance Tax Bill

Saying that imposing a severance tax on growing natural gas production in the Marcellus Shale could hurt his state's natural gas industry, Pennsylvania Gov. Ed Rendell last week announced that he was dropping the proposed 5% tax plan until at least next year. A key supporter of the severance tax in the state's legislature said he will continue to push to have it implemented as soon as next spring.

Rendell, who had proposed the severance tax to help the state deal with a loss of $3.2 billion in revenue compared with 2008, still thinks it is "a good idea" and he is likely to "revisit" the issue again next year, according to Rendell press secretary Gary Tuma.

"There was some concern from the industry -- and I think from some legislators as well -- that as they were getting up and running, and gearing up to do some Marcellus Shale drilling here in the state, that maybe we would just wait a while to impose the tax," Tuma told NGI.

In laying out the state's 2009-2010 budget in February, Rendell proposed the tax to generate $107 million a year from natural gas production within the state (see NGI, Feb. 9). "Pennsylvania has immense natural gas reserves -- in an area known as the Marcellus Shale -- that are now being tapped by private companies," the budget plan said. "These companies will extract an estimated 57 Tcf of gas from the Marcellus Shale over the next 25 years, and in the 2009-10 budget Pennsylvania joins the 28 other states that ensure that the public receives a share of the proceeds from the use of these resources."

Pennsylvania's HB 1489 would impose a "privilege tax" on all of the state's natural gas producers at a rate of 5% of the gross value at the wellhead, plus 4.7 cents/Mcf (see NGI, June 29). As written, the tax would not apply to smaller stripper wells that produce 60,000 Mcf/d or less. The legislation resembles an extraction tax implemented by West Virginia in 1987, which levies a 5% tax on the gross value of gas extracted plus 4.7 cents/Mcf.

Rep. Camille "Bud" George (D-74) of Clearfield County, chairman of the House Environmental Resources and Energy Committee, who introduced HB 1489, said he has not given up on his legislation. He plans to press ahead with the severance tax bill, "perhaps with the idea that it will take effect April 1, 2010," he said.

"This would give the industry time to prepare and will avoid an even more super-heated political arena next year, when the governorship and the entire House is up for election."

George said he felted "betrayed" when he first heard that Rendell had pulled the severance tax off the negotiating table.

"However, after reading the governor's entire remarks, I understood the reasoning and the pressures he is facing as he seeks compromises to reach a budget accord," George said. "Revenue shortfalls in the billions of dollars are forecast for next year and in 2011, so a fair and reasonable severance tax is coming." The severance tax described in his bill would generate roughly $600 million annually for state and local governments by 2013-14, according to George.

The legislation has been opposed by Republican members of the Pennsylvania House of Representatives, who offered their own plan to further tap into Marcellus Shale deposits by expanding natural gas drilling to 390,000 acres of state forest land over the next three years -- a proposal one conservation group quickly labeled "irresponsible" (see NGI, March 30). Democratic legislators and a coalition of environmental, conservation and sporting groups said a severance tax should be levied on natural gas drilling in the state (see NGI, March 23).

Citizens for Pennsylvania's Future (PennFuture), a statewide public interest group that has been a vocal supporter of Rendell's proposal, said that failure to adopt the severance tax would be good news for energy companies, but "the loser would be the Pennsylvania taxpayer."

"Pennsylvania is the only state with substantial mineral or gas deposits that does not assess a severance tax to pay for the depletion of a nonrenewable resource," PennFuture said. "And failing to charge a severance tax allows the drillers to foist some of the costs of drilling -- damage to roads and bridges, increased demand for sophisticated emergency services, contaminated drinking water supplies, increased demands on environmental regulators -- onto the backs of taxpayers."

The Marcellus Shale Committee, which represents the oil and gas industry in Pennsylvania, has said the severance tax would make development in Pennsylvania less appealing than in other large gas-rich states. A Pennsylvania State University study concluded that the Marcellus Shale basin would continue to be a hotbed of activity, pumping an estimated $14.17 billion into the state's economy in 2010 and creating more than 98,000 jobs, while generating $800 million in state and local revenues (minus royalties) -- barring the imposition of a severance tax, which the study found would curtail drilling activity and would cut state and local tax revenue by $1.4 billion between now and 2020 (see NGI, Aug. 3).

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