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Gov. Wolf Tries Again for 6.5% Severance Tax on PA NatGas Production

Pennsylvania Gov. Tom Wolf on Tuesday proposed for the third time a severance tax on natural gas production to help plug yet another structural budget deficit that's projected to be $3 billion in the state's next fiscal year, which begins in July.

A first term governor who has pitched the severance tax since he took office in 2015, Wolf has repeatedly called for other broad-based tax increases. He struck a less combative tone in this year's budget address, appealing to accomplishments that he's achieved with the cooperation of a Republican-controlled legislature that's only gained seats since November.

Wolf's 2017-2018 budget abandons his efforts in years past to increase the personal income tax rate, expand the state's sales tax base and increase consumption taxes, but as he did last year, Wolf is asking lawmakers to approve a 6.5% tax on natural gas production.

"I'm offering a budget proposal that represents a responsible solution to our deficit challenge and a different approach from the way things have been done in Harrisburg for almost a generation," he told the General Assembly on Tuesday. "Let's start here: in my proposed budget, there are no broad-based tax increases."

For years the state has confronted budget deficits. Lawmakers have also tried but failed for years to agree on and pass a natural gas severance tax. While Republicans appeared to greet this year's budget address with a warmer reception, expressing optimism that they can get a budget passed by July 1, Wolf's severance tax proposals have been handily defeated before. His first budget battle with the legislature came in 2015 with a nine month impasse that included disagreements over a severance tax.

Like last year's proposal, producers would have to pay both the 6.5% tax on natural gas and the state's impact fee. But they would be able to take a credit against the tax amount for the impact fees they pay.

"We're disappointed that Gov. Wolf continues to focus on additional energy taxes, which will further harm the commonwealth's economic competitiveness and cost good-paying Pennsylvania jobs," said Marcellus Shale Coalition President David Spigelmyer. "While we're cautiously optimistic that the national energy market may begin to recover from the recent global downturn, higher energy taxes, along with the Wolf administration's wave of job-crushing regulations, will stunt our industry's ability to reinvest in Pennsylvania."

The impact fee is levied on all unconventional wells in the state during their first 15 years of operation, regardless of how much they produce. The fee schedule and the amount companies must pay for each well depends on the number of years they've produced. Impact fee collections for 2016 are again expected to decline because fewer wells were drilled last year and the fee is highest for those in their first operating year. Since the impact fee was enacted, the state has collected more than $1 billion for distribution to local communities and state agencies.

Wolf proposed a $32.3 billion budget on Tuesday, or 1.8% more than the 2016-2017 budget. It provides more funding for human services and education, among other things. His proposal mostly eliminates the deficit by identifying cuts and savings initiatives in excess of $2 billion. Wolf's administration estimates that if his severance tax is enacted in July, it would generate nearly $294 million.

He's also proposing to eliminate corporate tax loopholes to generate more revenue by capping net operating losses at 30% and eliminating sales tax exemptions for services like computer programming and airline food.

Wolf, a Democrat, joins other leaders in the region that want to generate more revenue from prolific shale production. Ohio's Republican Gov. John Kasich renewed his call last month for a 6.5% tax on unconventional oil and natural gas production in addition to a 4.5% tax on natural gas liquids.

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