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Budget Pressures Prompt Pennsylvania to Again Consider Natural Gas Severance Tax

With less than two weeks left to find revenue to fill Pennsylvania's projected $1.5 billion budget deficit, a severance tax on natural gas production is once again being discussed in earnest as lawmakers search for ways to avoid deeper spending cuts.

By law, the state budget must be completed by June 30. An April report by the Pennsylvania Independent Fiscal Office that showed tax collections lagging projected expenditures has lawmakers on the defensive, with more on both sides of the aisle stepping-up their calls for a natural gas production tax.

Such a debate has been ongoing since about 2007 when exploration and production took off in the prolific Marcellus Shale, but in the time since, both Republican- and Democratic- controlled legislatures have failed to agree on a severance tax (see Shale Daily, Oct. 22, 2010). But as Pennsylvania has earned the distinction of the nation's fastest-growing gas producing state, with Energy Information Administration estimates showing that Marcellus production will soon exceed 15 Bcf/d, it has become increasingly difficult for lawmakers to look the other way (see Shale Daily, Jan. 28).

Other budget fixes have been floated, however, such as a Medicaid expansion and calls from Republican Gov.Tom Corbett to enact pension and liquor reform. Given such proposals, and the legislative gridlock that has surrounded a severance tax in recent years, it looks increasingly unlikely that lawmakers will be able to include such a measure in the 2014-2015 budget.

Pennsylvania does not collect taxes on oil and gas production, implementing instead an impact fee pushed by Corbett's administration in 2011 after he took office on a no-new-taxes pledge. The state collects a flat fee for all the unconventional wells drilled each year (see Shale Daily, June 4; Feb. 15, 2012; March 29, 2011).

A spokesman for state House Majority Leader Mike Turzai of Pittsburgh said Republican leaders still do not support a severance tax. But some GOP members in the Republican-controlled legislature have stepped forward to push a severance tax in the face of declining revenues and growing natural gas production.

At a Statehouse press conference in April, a group of bipartisan lawmakers gathered to rally support for a new tax. Of the nine state legislators in attendance, just three were Republicans, all from the southeast corner of the state, where resistance has been growing against the oil and gas industry in the region surrounding Philadelphia. At the press conference, Rep. Gene DiGirolamo reportedly said raising a severance tax was of "critical importance" to the state, and he called it a commonsense approach to Pennsylvania's budget woes.

No fewer than three severance tax proposals are on the table in both the state House and Senate, each calling for a 4%, 4.9% and 5% tax rate on production. DiGirolamo introduced the 4.9% legislation and has even gone so far as to propose his own budget that he says would generate  $1.1 billion between 2014 and 2016.

Democrats meanwhile continue to attack Corbett's reluctance to support a severance tax.

"We have already offered a bill that would tax the extraction of natural gas from the Marcellus Shale at a rate of 5%," said state Sen. Vincent Hughes, the ranking Democrat on the Senate Appropriations Committee. "Senate Democrats previously offered a commonsense plan detailing $1.1 billion in revenue options, including expanding Medicaid, slowing corporate tax cuts and modernizing our state liquor store system. These are all good choices that would not require any broad-based tax increases.”

Opposition to a production tax remains staunch as well, with the Marcellus Shale Coalition (MSC) and the Pennsylvania Chamber of Commerce continuing to assert that what producers don't pay for in severance tax, they make up for under the state's 10% corporate tax. Since the impact fee was enacted in 2012, producers have paid more than $630 million in revenue, on top of $2.1 billion in corporate and other taxes (see Shale Daily, April 4). 

Supporters claim that's not enough, and the debate has been prodded along after a Democratic primary to challenge Corbett in which the candidates called for a new severance tax, including winner Tom Wolf, who has accused the governor of playing "fast and loose" with the state's natural gas resources (see Shale Daily, May 21).

A poll commissioned by the MSC and conducted June 6-8 among 502 registered Pennsylvania voters found that 55% favor a new tax on oil and gas drillers, while 58% said they would not support such a tax if they knew it would lead to jobs leaving the state.

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