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NatGas Severance Tax Proposals Piling Up in Pennsylvania

Within days of one another, state lawmakers on both sides of the aisle emerged with another round of legislative proposals to raise more fees against Pennsylvania's shale gas drillers.

Even before the 2015-2016 legislative session began, three severance tax proposals were rolled out late last year (see Shale Daily, Dec. 22, 2014). Similar to those proposals, a group of bipartisan lawmakers in the state House of Representatives on Tuesday proposed a 3.2% severance tax that would be paired with the state's existing impact fee for an effective rate of about 5%. Just two days later, a group of Democratic state senators proposed one of the highest rates yet, announcing legislation that would not only keep the impact fee but enact an 8% tax on unconventional natural gas production.

For years now, both Republican- and Democratic-controlled legislatures have tried and failed to agree on a severance tax (see Shale Daily, Jan. 28, 2014). Instead, in 2012 lawmakers passed an impact fee, which charges a flat rate for all wells in the state each year no matter how much gas is produced and allocates the revenue to local communities and state agencies (see Shale Daily, Feb. 15, 2012). That rate, depending on the value of gas, amounts to a roughly 2-3% tax.

Although local communities that benefit from those revenues support the impact fee, it's growing harder and harder for state lawmakers to ignore skyrocketing production in the Marcellus shale, which increased 62% year-over-year in 2013 to 3.3 Tcf, making Pennsylvania the nation's second largest gas producer behind Texas, which produced about 6.8 Tcf that year (seeShale Daily, Feb. 20, 2014). Production through the first half of last year was nearly 2 Tcf in an indication that 2014 production is likely to surpass 2013 totals (see Shale Daily, Aug. 19, 2014).

Some of the fiercest debate about the topic is expected to occur this year in the general assembly, especially after the election of Democratic Gov. Tom Wolf, who campaigned on a pledge to enact a 5% severance tax -- a proposal widely expected to be included in his first budget due in March (see Shale Daily, Jan. 16). Wolf's predecessor, former Republican Gov. Tom Corbett, opposed a severance tax and instead backed the impact fee.

On Tuesday, Republican state Rep. Gene DiGirolamo of Bucks County, along with two House Democrats and another Republican, said their 3.2% proposal could generate more revenue for the state's unfunded pension obligations, environmental programs, basic education and human services. Pennsylvania's budget deficit has ballooned to $2.3 billion since last year, and the lawmakers said a severance tax is sorely needed to help plug the shortfall.

"Most Pennsylvanians agree that we should enact a drilling tax as a matter of sound public policy, but the discussion at this point is what that tax will look like and what priorities it would fund," DiGirolamo said. "In addition, it's important to keep the impact fee in place so that communities directly dealing with drilling can still be protected. This legislation is a start to the conversation, and one I believe will continue throughout the session."

According to the state budget office, Pennsylvania's pension liabilities for state workers and public school employees are nearly $50 billion. Proposals floated late last year are similar to DiGirolamo's and would enact a severance tax and keep the impact fee to help generate more revenue for the pension system or public education. Under current law, if the state enacts a severance tax, it must do away with the impact fee or rewrite legislation to keep it.

On Thursday, three state Democratic senators from southeast Pennsylvania proposed an 8% severance tax that would also be paired with the impact fee. They said that legislation could generate nearly $2 billion within the first few years of becoming law. Their plan would also send that revenue to public education, pension liabilities and environmental protection.

Those lawmakers, like others who have proposed severance tax legislation this session, cited oil and gas producing states that already have severance taxes as a primary reason to pass one in Pennsylvania.

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