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Pennsylvania Severance Tax Talks Move to Governor's Mansion

Despite meetings that brought together members of both chambers and both sides of the aisle in Pennsylvania's General Assembly and representatives from the gas industry at the Governor's Mansion in Harrisburg Monday and Tuesday, agreement on a proposed natural gas severance tax bill remains elusive, according to Senate President Pro Tem Joe Scarnati (R-Jefferson).

The chances of SB 1155 becoming law "diminish by the hour," Scarnati said after he and other Senate Republican leaders met with Gov. Ed Rendell Tuesday morning.

"I don't believe that we're any closer to a deal. Certainly, the governor has laid out some different proposals. We continue to have the same concerns we've had in the past on the tax rate and certain exemptions. Whether or not anybody moves further I think is yet to be seen."

Rendell said a proposed compromise cobbled together during the meetings could be enacted before the end of the 2010 legislative session if the industry and Senate Republicans throw their support behind it. The plan would phase in the severance tax over the next three years while exempting up to 10% of some production and distributions costs.

"This is fair," Rendell said. "It is a significant compromise. The industry should accept it. The Senate Republicans should accept it."

"The governor's position is significantly different than the bill that passed the House on both the rate and the distribution of pro- ceeds," said Senator Dominic Pileggi (R-Delaware). "We're certainly far apart from any agreement, but the governor's position is much different than where the House was and much closer to our position than where the House was." Rendell asked Senate Republican lead- ers to meet with him again Wednesday, Scarnati said.

On Monday afternoon Rendell hosted a meeting of Pennsylvania House Republicans and Democrats, along with representatives of Range Resources, Chesapeake, Chief Oil & Gas and Southwest Energy.

Adding a significant hurdle to possible passage of a severance tax bill is the dwindling number of scheduled days remaining in the 2010 legislative session and the looming Nov. 2 election. The House passed a version of SB 1155 last month that included a 39 cents/Mcf tax rate (see Shale Daily, Oct. 5) and Rendell previously proposed a 5% extraction tax, plus 4.7 cents/Mcf.

The tax rate passed by the House "might just as well have been a moratorium bill to drive the industry out of the state," Scarnati said. "Maybe that was their intent, I'm not sure." Shallow gas producers, in particular, would be hit hard by the House bill. Senate Republicans have said they want exemptions for shallow gas producers to be included in the final legislation.

The Senate, which reconvened Tuesday after being in recess since Sept. 29, has taken no action on the severance tax. There are only two more scheduled session days (Oct. 13-14) remaining on the Senate calendar before the election and only one more (Nov. 17) before the end of the year. The House is not scheduled to meet again until Nov. 8.

Scarnati and other Senate Republicans have said the House may have violated the state's constitution by adding the severance tax language to a county bonding bill. Even if they were to pass the bill, it could get overturned in court, they said. Scarnati has requested an official opinion from the state's Legislative Reference Bureau (LRB) "regarding the likely constitutionality" of SB 1155. On Tuesday, Scarnati said his office has received the LRB opinion and it indicates that SB 1155 has constitutional problems.

But according to the Pennsylvania House Democratic Caucus, the LRB found only a single violation in SB 1155 that "can be easily cured by Senate amendment."

"The Senate's argument on constitutionality is a red herring," said House Majority Leader Todd Eachus (D-Luzerne). "Simply put, the ball is clearly in the Senate's court, morally, ethically and legally."

"The procedural and process aspects of this are somewhat challenging because of the constitutional provision that fund-raising bills start in the House," Pileggi said. The best way for the process to proceed would be for a new bill to come out of the House "that would not be defective and would contain a proposal that we could support in the Senate and the governor could sign. Whether the House is will or able to do that is still an open question." The House would have to add days to its legislative calendar and the Senate probably would have to work longer than currently planned as well, he said. "We're going to continue to work on this, but we will not come back after the election."

Noting that the state has been producing hydrocarbons for well over 100 years, Pennsylvania state Senator Mary Jo White, chairwoman of the Environmental Resources and Energy Committee, said a tax doesn't make sense now.

"I am not a fan of the severance tax," she told an audience Monday at the 2010 Marcellus Summit at Penn State. "The governor made it a condition of signing the budget. It may not make it across the finish line, I don't know. What other business would come into your state and say, 'I want to invest hundreds of millions of dollars in your economy' and not ask for us to build them a plant or provide any subsidies. We'd be crawling all over ourselves to find out what we could do to attract them and we certainly wouldn't be [implementing] a tax before it got off of the ground."

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