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Right Time for Gas Severance Tax, Says Pennsylvania Governor

Pennsylvania Gov. Ed Rendell last week unveiled his state budget plan for fiscal 2011 in which he asked lawmakers to reconsider a proposal to impose a 5% severance tax on natural gas extraction in the Marcellus Shale.

The Democratic governor last month said he would ask the General Assembly to reconsider the tax proposal, which was tabled in 2009 during testy budget negotiations (see NGI, Jan. 18; Sept. 7, 2009). Pennsylvania's fiscal year 2011 begins July 1, which is when Rendell wants the gas extraction tax to take effect.

"Natural gas companies are accustomed to paying a severance fee," Rendell said. "Since every other major gas-producing state imposes one, drilling companies accept it as a cost of doing business." He noted that producers had confirmed their ability to pay the tax by agreeing to pay twice what was expected in a recent lease auction on state forest land. "If they believe there's gold in them there shale, we can tax it."

Revenue from the tax, estimated to generate $160.7 million this year if enacted July 1, would be paid into a special state fund that would not be tapped before July 2011 when it would be used to offset an anticipated loss of $2.3 billion in federal stimulus money.

Also included in the budget is a line item indicating the state could earn $180 million by leasing more state forestland for gas development. Sixteen energy companies in January bid an average of $4,020/acre to drill on six parcels comprising 32,000 acres of state forest in north-central Pennsylvania. The lease sale's total of $128.5 million generated more than twice the amount called for by lawmakers and generated a windfall of almost $60 million.

"The budget that I introduce today is a budget that works," Rendell said last Tuesday. "It keeps the cost of state government down while still investing in our future. It balances the needs of our citizens with the financial pressures that the national economic downturn has imposed. It readies our young people and businesses for the opportunities a reviving economy will bring."

In addition to the proposed tax on gas extraction, Rendell said a push to build the state's alternative energy sector would bring more jobs and money. He called for the enactment of higher alternative energy standards to remain competitive and attract future investment.

"It's not just about energy, it's about jobs, and we must protect these opportunities by raising our alternative energy requirements as soon as possible," he said. The proposed budget also continues to invest $650 million to help state companies and consumers lower their energy costs and develop renewable energy industries.

Environmental group Citizens for Pennsylvania's Future (PennFuture) praised Rendell's proposal to tax shale drilling and his proposals to pass alternative energy legislation.

"Without the tax, the people of Pennsylvania will continue to pay the price for the drilling with no compensation for the loss of our natural assets," said PennFuture CEO Jan Jarrett. "We have no way of knowing when our economy will rebound. But we are letting revenue slip through our fingers as the drillers proceed without a severance tax. The state Senate and House need to enact a severance tax now. We cannot afford to give multi-billion-dollar corporations a free ride while our citizens are hurting."

However, Marcellus Shale Coalition Executive Director Kathryn Klaber said it's still too early to impose a severance tax.

"Marcellus Shale development is moving out of its infancy, but remains very much in an early development phase," she said. "Fewer than half of the 1,100 Marcellus Shale wells that have been drilled are tied into a pipeline and moving gas to markets. Pennsylvania still lacks much of the critical resources and infrastructure needed to develop the Marcellus Shale and compete with other leading natural gas states on a continuing basis. This includes efforts to train and develop the local workforce. So much progress has already been made, but it's still very early."

Independent gas producers, she said, have invested more than $10 billion in Pennsylvania's economy to develop the Marcellus Shale. According to a Penn State University study, this activity is expected to generate approximately $603 million in state and local tax revenues this year alone. Total revenues for the state and local governments from 2008 through 2010 will approach $2 billion. The same study predicts that more than 110,000 new jobs will be created in Pennsylvania by the end of this year.

"We must find productive ways to maximize and increase these impacts for everyone's benefit, not deter growth," Klaber said.

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