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Pennsylvania’s Wolf Renews NatGas Severance Tax Proposal, Pushing For 6.5% Rate

Pennsylvania Gov. Tom Wolf on Tuesday continued to push for broad spending increases that would be funded by a suite of new taxes, renewing a proposal during his 2016-2017 budget address that calls for a 6.5% severance tax on natural gas production.

Wolf, a Democrat, told the general assembly it is imperative that the state generate new revenue streams to cover its mandatory costs and fill a $2 billion budget deficit. The state has faced the shortfall since before Wolf took office last year. Tuesday's address came more than seven months into an impasse that has left the state without a budget, following Wolf's move to veto a Republican-crafted 2015-2016 budget in June and the legislature's failure in November to reach a compromise on a revamped spending bill (see Shale DailyNov. 10, 2015July 1, 2015).

As a result, Wolf is the state's first governor in decades facing the task of balancing two budgets at once. His tax increase proposals also come in the midst of an election year.

"My fellow Pennsylvanians, our commonwealth is in crisis," he said. "A crisis that threatens our future...This deficit isn't just a cloud hanging over Pennsylvania's long-term future. It is a time bomb, ticking away, right now, even as I speak. If it explodes -- if the people of this chamber allow it to explode -- then Pennsylvania will experience a fiscal catastrophe the likes of which we have never seen."

Wolf's latest budget plan renews many of the proposals that failed in his last budget and that were met with staunch opposition from a Republican-controlled legislature and special interests. He once again wants to expand the state's sales tax base, increase the personal income tax rate and increase consumption taxes, such as those for tobacco products. But in particular, a bid to enact a severance tax on the state's prolific Marcellus Shale has eluded legislatures in the state for years and has been met with fierce opposition from Republicans and the industry alike (see Shale DailyJan. 28, 2014).

His latest proposal calls for a 6.5% tax on the gross value of natural gas. Like his previous proposals, it would keep the state's impact fee, but this time he wants to offer producers a credit for those fees that would reduce their severance tax payments.

"Low oil prices are not expected to have a big impact on natural gas exploration," his administration said in a budget brief made available to the public and the news media. "The current growth phase in the Marcellus Shale production still mostly involves building infrastructure to service existing wells."

In 2015, Wolf initially proposed a 5% severance tax plus a 4.7 cent/Mcf volumetric fee (see Shale DailyFeb. 11, 2015). He later scaled that plan back to 3.5%, including the volumetric fee, in an effort to raise more support for the proposal. But the lower rate failed in the House of Representatives by a wide margin of 127-73 (see Shale DailyOct. 7, 2015).

"Numerous votes in the House over the last year have demonstrated a lack of support for broad-based tax increases like the governor is proposing for the income tax," said Republican Rep. Martin Causer of Northwest Pennsylvania.

Even before Wolf gave his budget address, the state's largest oil and gas trade groups said they would host a conference call with reporters on Wednesday to give their opinions of his latest budget proposal. Wolf was widely expected to propose the severance tax again after he said in November that he wasn't giving up on it (see Shale DailyNov. 13, 2015). The industry has continued to voice its opposition to the tax, airing television commercials throughout the state, writing op-ed pieces in local newspapers and countering Wolf's public remarks with regular press conferences on the topic.

"The governor continues to ignore market realities in pushing for additional energy taxes that will cost even more good-paying Pennsylvania jobs in this depressed global commodity environment," said Marcellus Shale Coalition President David Spigelmyer after Wolf gave his address. Spigelmyer added that "there couldn't be a worse time for additional energy taxes."

The state's impact fee is charged for all unconventional wells in the state during their first 15 years in operation, regardless of how much they produce. It is calculated with a multi-year schedule that is based on the average annual price of natural gas. Since its inception, the fee has generated nearly $856 million for distribution to local communities and state agencies, but 2015 collections are projected to fall by as much as $33.9 million on low oil and gas prices (see Shale DailyFeb. 1).

Under Wolf's current proposal, spokesman Jeffrey Sheridan said producers would still be required to pay the impact fee in addition to the severance tax, but they would be able to take a credit against the tax amount for the fees they pay. The administration estimates that the 6.5% rate would generate $350.9 million in revenue in 2016-2017, with a projected $133.1 million credit for the impact fee, bringing estimated revenue in at $217.8 million.

Wolf proposed a $32.7 billion budget for 2016-2017. It assumes the legislature can pass the $30.5 billion 2015-2016 budget that lawmakers failed to pass last year. In all, the latest budget would increase spending by $2.2 billion. The increase would be paid for by increasing the personal income tax rate from 3.07% to 3.4%, expanding the sales tax base to items not already taxed, the severance tax, increasing consumption taxes on items such as cigarettes, and administrative savings, among other things.

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