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Wolf Proposes Hybrid NatGas Severance Tax For Pennsylvania

Pennsylvania Gov. Tom Wolf for the first time since taking office in January outlined his proposal for a hybrid severance tax on natural gas production in the state that he estimated could raise up to $1 billion in its first year, saying the "lion's share" of that revenue would go toward public education.

Wolf, a Democrat, campaigned on a pledge to enact a severance tax similar to West Virginia's 5% rate (see Shale Daily, Jan. 16). Switching course slightly on Wednesday, Wolf kicked-off his "schools that teach" tour by telling reporters during a press conference at an elementary school in southeast Pennsylvania that the tax would be based on both the market value of gas and the volume produced.

Under his proposal, called the Pennsylvania Education Reinvestment Act that will be included in his first budget in March, Wolf's plan calls for a 5% flat rate multiplied by the market value of gas in addition to a 4.7 cent/Mcf volumetric fee.

"From an economic point of view, we cannot continue to disinvest in our education system. This is our future, for all of us standing here -- for all of us in Pennsylvania," Wolf said. "If we're going to get our commonwealth back on track, we're going to have to figure out how to fund education adequately."

Wolf's predecessor, former Republican Gov. Tom Corbett, staunchly opposed a severance tax on the state's booming oil and gas industry. When he took office in 2011, he rolled back education funding levels by roughly $1 billion as federal stimulus money dried up, leaving deficits at public schools across the state. Pennsylvania is also facing a more than $2 billion budget shortfall, which has prompted other severance tax proposals from both Republican and Democratic lawmakers to help the general fund, education spending and state pension liabilities, among other things (see Shale Daily, Feb. 6; Dec. 22, 2014).

"We sit on one of the largest natural gas deposits in the world. We have the natural resources to actually do something about the problem here," Wolf said. "A severance tax on that resource would be something that's really appropriate. How radical would that be? Well, Texas does it; Oklahoma does it; North Dakota does it; Alaska, Louisiana, they do it, and West Virginia does it. And so, today, I'm proposing that we do it."

The state would realize $1 billion in revenue from the tax beginning in fiscal year 2017, which starts July 1, 2016. He did not say, however, when the tax would go into effect if it’s passed this year. Responding to concerns that his administration's revenue estimates are too high, Wolf said that assessment is fair, but noted the money -- no matter how much -- is sorely needed.

He also said the tax is reasonable and better than other alternatives such as a ban on drilling or a larger tax proposal, which he added are not threats.

"We can argue math all the time because I don't know what's going to happen an hour from now, let alone a year from now in terms of the price for natural gas -- that's a fair argument that things change," he said. "But this is based on the best projections, from I think, some very bright people. Whether it's $500 million or $600 million or $1 billion, it's real money and it's real money that our schools desperately need."

Former Democratic Gov. Ed Rendell, who left office in 2010, made a similar proposal for a hybrid system in 2009 when the state faced a $3 billion shortfall (see Shale Daily, July 12, 2010). 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 fee has collected $630 million since its inception. Industry representatives have repeatedly said that there is no room for a compromise on a severance tax, noting that oil and gas producers pay their fair share and face one of the highest corporate tax rates in the country.

"Pennsylvania is the only state that imposes a special impact tax that will have generated nearly $830 million by April of this year, directly benefiting all 67 counties throughout the Commonwealth," said Marcellus Shale Coalition President David Spigelmyer. "Pennsylvanians have realized more than $700 million in royalties from energy development on public lands. By any measure, these are significant revenues that are boosting local communities, as well as important environmental programs."

Although Wolf said the state’s current impact fee would be “rolled into” the severance tax, he did not say how revenue would be allocated under that structure. Under current law, if a severance tax is enacted the impact fee is voided.

Wolf said the "lion's share" of the severance tax revenue under his plan would go toward education. The rest, he said, would go toward the state Department of Environmental Protection, alternative energy development and local communities where most natural gas drilling occurs.

"I haven't exactly worked out the formula, but the idea is that localities will get a lot of money from this and they will be in good shape as a result of this severance tax," Wolf said, adding that he couldn't make any guarantees on exactly how much counties and municipalities would receive under his plan. "The whole point of this is not to take money away from our localities."

Although Wolf said more details about his plan would emerge with his first budget proposal, on the surface his severance tax is structured the same way as West Virginia's. Producers there pay 5% of the market value of gas in addition to a 4.7 cent/Mcf volumetric charge. West Virginia allocates 90% of those revenues to the state's general fund and 10% to counties and municipalities, with most going toward oil and gas producing counties.

If Wolf's plan is similar, there could be a chance that Pennsylvania localities receive less than the roughly $200 million per year allocated under the impact fee.

In an interview with NGI's Shale Daily last month, David Sanko, executive director of the Pennsylvania State Association of Township Supervisors (PSATS), which represents 1,454 townships across the state, said his organization is pleased with the current level of funding its members receive under the impact fee. Sanko said PSATS would oppose any reduction resulting from a new severance tax.

"Our township supervisors share the same concerns that state house members have," Sanko said. "Legislators rely on that closeness with the electoral voice to help them stay informed. Our House and Senate members look to borough councilman, township supervisors and city elected officials to help them understand what the communities expectations are. A lot of it too is legislators relying on the face value of the impact fee and the wisdom of that money as opposed to paying for bureaucracy in Harrisburg."

Both chambers in the Pennsylvania General Assembly are controlled by Republicans, where leadership has indicated that they'd rather resolve the state's budget issues through pension reform or by privatizing the state's 601 liquor stores.

It's also unclear if Wolf's severance tax proposal would apply to smaller natural gas producers in the state, or make exemptions for lower volume wells, as West Virginia does. When asked, Wolf's spokesman did not specify. 

"The governor's proposed tax hike could threaten the future of our state's best job creators," said API Executive Director Stephanie Catarino Wissman.

America's Natural Gas Alliance (ANGA) said it was disappointed with Wolf's proposal and added that cheap natural gas in the state has helped save school districts money.

"Now is not the time to put this progress at risk by singling out natural gas producers and imposing a burdensome tax that could hamper future production," Executive Director Frank Macchiarola said. "In fact, there is a great opportunity to boost economic development in the state by supporting critical infrastructure projects that will carry Marcellus gas to nearby markets."

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