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PA Passes Budget Without Severance Tax, Setting Stage For Future Battles

After weeks of renewed debate and a scramble to find revenue to plug a $1.5 billion deficit (see Shale Daily, June 17), Pennsylvania's General Assembly has once again passed a state budget without an oil and gas severance tax.

After it cleared the state House of Representatives last week (see Shale DailyJune 26), the state Senate on Monday approved the $29.1 billion budget, which increases 2014-2015 spending by $943 million, or 3.3% from the last fiscal year, and sent it to Republican Gov. Tom Corbett, who has not yet signed the bill because of unresolved pension costs.

"The budget I received tonight makes significant investments in our common priorities of education, jobs and human services. It does not address all the difficult choices that still need to be made," Corbett said in a statement issued late Monday. "It leaves pensions, one of the largest expenses to the commonwealth and our school districts, on the table."

Corbett was still working with leaders from both parties on Tuesday to reach agreement on state-funded pensions, which he said cost 60 cents for every new dollar of general fund revenues. Overall, the budget calls for no new taxes and instead leans on one-time funds, fees, postponements and temporary fixes like an increase in the amount of revenue generated from leasing oil and gas rights in state-owned parks and forests.

In May, Corbett issued an executive order lifting a three-year old ban on such leases that he hoped would generate an additional $75 million (see Shale DailyMay 23April 24). Lawmakers, though, included a provision in the state budget that calls for generating $95 million in revenue through either raising the cost of land or opening up more of it for drilling, which wasn't immediately clear on Tuesday.

The budget was crafted mainly by Republicans, who control both chambers of the state legislature. While proponents hailed its tax free passage, critics decried its one-time fixes and said it would create problems farther down the road.

"While the budget making process can be challenging at times, with competing interests at odds far too often, our industry is very pleased that the General Assembly once again made Pennsylvania's economic growth and private-sector job creation tied to shale development a key priority," said Marcellus Shale Coalition (MSC) President David Spigelmyer. "New and even higher energy taxes, rammed through without meaningful analysis, could undercut this positive and shared economic progress."

The MSC, along with two other leading trade groups in the state, sent a letter earlier this month to state lawmakers urging against passage of an oil and gas severance tax. Spigelmyer said his organization will continue to work with legislators to prevent similar efforts in the future.

The Pennsylvania Budget and Policy Center (PBPC), which has said corporate income taxes paid by drillers are declining and the impact fees they pay are falling short (seeShale DailyJan. 28Sept. 9, 2013), said the budget's lack of new taxes was its single biggest flaw.

"The budget once again lets the gas drillers avoid paying a tax they pay in every other major gas producing state -- a tax that could provide sustainable, growing revenue to truly balance the budget and support public schools," said PBPC Director Sharon Ward. "Of all the magical thinking in the budget, the most troubling is the claim that the budget does not raise taxes."

The latest round of speculation and debate about a potential severance tax is just another check mark on a long list of budget and legislative battles about the issue that have taken place annually since 2007, when development in the Marcellus Shale truly started to take hold. The debate has only intensified in recent years with structural deficits predicted in the state budget through 2019 and with natural gas production pushing Pennsylvania to the seat of the country's second-largest producer.

Professor Terry Madonna, director of the Center for Political and Public Affairs at Franklin and Marshall College in Lancaster, PA, told NGI's Shale Daily that he believes the issue is likely to be an "enduring battle" for the foreseeable future, with a severance tax bill not likely to pass anytime soon.

"There's been a reluctance on the part of political leaders to bring up votes that are controversial if indeed one chamber will do it and the other will not," Madonna said. "For instance, I think this time Senate leaders reached a conclusion that even if there was enough support in their chamber to get it passed, they would never get it through the House. So why put your members up for that kind of a vote?"

Even if Democratic candidate for Governor Tom Wolf, who favors a 5% severance tax (see Shale DailyMay 21), wins office in November, Madonna said he'll likely face stiff opposition from a Republican-controlled legislature, which would renew the debate yet again.

"I think this is going to be an ongoing battle," Madonna said. "[Wolf] will still have to deal with a Republican legislature. And I'll be candid, I've polled on this, this is a popular tax among the public, but this  industry is also popular and held in a high regard."

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