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Pennsylvania Senate Committees Show Little Support For Severance Tax

Members of two key Pennsylvania Senate committees seemed to waver in their support for a severance tax on oil and natural gas production during a joint hearing about the proposal on Monday, with many lauding the industry for its accomplishments in the state.

For years, both Republican- and Democratic- controlled legislatures have failed to agree on the state severance tax, choosing instead to pass an impact fee in 2012, which charges a flat rate for each unconventional well in the state regardless of production (see Shale Daily, Jan. 28, 2014; Feb. 15, 2012). On Monday, more than 10 years after Range Resources Corp. drilled the first Marcellus Shale well in the state and more than eight years after development began in earnest, lawmakers were back at the drawing board to hear a spate of testimony from those on both sides of the severance tax debate.

"I'm hugely supportive of the wonderful things that have happened and I hope will continue to happen in the production of natural gas and building our economy here in Pennsylvania," said Sen. Scott Hutchinson, a northwest Pennsylvania Republican. "I actually thought about wearing a T-shirt today that said 'I love fossil fuels,' because I do."

Hutchinson delivered his remarks before a panel of industry representatives who said producers can ill afford to pay another tax with the current commodities downturn.

Members of the Environmental Resources and Energy and Finance Committees gathered to hear testimony about Democratic Gov. Tom Wolf's proposal to impose a 5% tax on production in addition to a 4.7 cent/Mcf volumetric fee (see Shale Daily, Feb. 11). Wolf has said he based his proposal on nearby West Virginia's severance tax, but there are also five other severance tax bills pending in the Republican-controlled Senate for the committees to consider, ranging from 4-8% (see Shale Daily, Feb. 6).

Most of the bills, similar to Wolf's proposal, would dedicate more money to education and the environment.

"Advocates for Gov. Wolf's highest in the nation energy tax often say that the proposal is reasonable and modeled closely to neighboring West Virginia," said Marcellus Shale Coalition President David Spigelmyer. "West Virginia's suffocating energy tax has actually discouraged job creation and capital investment in West Virginia. West Virginia currently has 18 rigs operating, down 28% from last year and nearly 30 rigs behind what's active in Pennsylvania today.

"West Virginia has landed roughly 15% of the number of jobs that we've landed in Pennsylvania over the last two years, and Pennsylvania's impact tax has brought in $184.5 million more than West Virginia's severance tax on natural gas," he added.

Wolf has also proposed setting an artificial floor for the severance tax of $2.97/Mcf, which the state's Independent Fiscal Office (IFO) said would make the tax among one of the highest in the nation.

"The proposed severance tax will likely move Pennsylvania from one of the lowest severance tax states to the highest tax state, relative to other major gas-producing states," said IFO Director Matthew Knittel during testimony. "Over several years, economic theory suggests that most of the tax will be pushed forward to final prices and output will fall by some amount. The magnitude of the output reduction is difficult to quantify because it will partly depend on demand from markets that currently have limited access to natural gas, as well as new markets."

At current prices -- Pennsylvania natural gas sold for less than $1/Mcf at key trading points last month -- the effective tax rate would be roughly 17%, Knittel said.

Republican Sen. Camera Bartolotta of southwest Pennsylvania indicated that she heeded those warnings and told the industry panel that she hoped their information was not falling "on deaf ears." Democratic Sen. John Yudichak of northeast Pennsylvania lauded the industry for helping bring down energy costs in the state and added that it was important for lawmakers to get the state's tax policies right. Without pressing, other lawmakers asked industry representatives about operator's claims to shareholders that prices would eventually come up along with profits.

They also asked about how certain operators have paid little in corporate net income taxes, despite the industry's claim that it already pays its fair share.

"You have tax laws in place that keep people from free-loading," Spigelmyer said without addressing specific companies. "In fact, if you have companies investing more than they're making, what's happened bears out our testimony. The fact is that no one in Pennsylvania today is in a cash positive position, therefore you don't have significant corporate net income collections because they're not in a profitable position yet."

Democratic Sen. Art Haywood of southeast Pennsylvania said the industry's responses sounded like "the story of Chicken Little, ‘the sky is falling, the sky is falling,' but really it's not the sky that's falling," he said. "It's just that we're in a period of time when we've got very low market prices, and so the question for the Senate is in fact do we come up with tax policies based on very low market prices, when there's a number of reports that the industry is making that the price is going to go up."

Monday's hearing was the first substantive legislative action on the pending severance tax proposals. Lawmakers are entering the final stretch of budget negotiations, with state law requiring that a budget be passed by July 1.

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