Another budget season in Pennsylvania again has the natural gas industry playing defense, as production and consumption taxes are being considered by the House amidst a 39-day impasse that could find the state without money to pay its bills by the end of the month.
"We wouldn't say it's inevitable, but the fact that this got passed out of the Senate and it's in the House has us taking it very, very seriously," said Marcellus Shale Coalition President David Spigelmyer. He spoke Tuesday during a call with media and was asked how concerned he is about this year's severance tax proposal compared to others in the past.
This year, a coterie of pro-business groups, representing some of the state's largest employers, have joined the gas industry's cause to fend off the Republican-controlled Senate's severance tax proposal, which is part of a larger revenue package to fund spending and plug a $2 billion-plus budget deficit.
"We are highly resolved that this will not pass and that we leave it unto ourselves to take every measure, whether it is Hill visits or town hall meetings, [advertising], smoke signals, or we'll hire a plane to fly down the shore in New Jersey with a banner behind it," said Pennsylvania Manufacturers’ Association President David Taylor. "We're going to do whatever is necessary to convey the absolute truth of the situation that putting new taxes on this industry is going to sacrifice Pennsylvania's future economic growth. It's a very bad idea and it shouldn't happen."
Democratic Gov. Tom Wolf allowed the state's $32 billion budget pass into law in July without his signature. The General Assembly, however, has yet to agree on a plan to pay for it. In a narrow vote late last month, the state Senate passed a revenue package that would require shale gas producers to pay an effective tax rate of 2 cents/Mcf on produced volumes in fiscal 2017-2018 to generate an estimated $100 million. The annual rate could go up or down after that. The revenue package would implement a 5.7% tax on gas utility service, increase the tax on electricity bills and others for telephone service.
The gross receipts tax on utility bills would generate an estimated $405 million per year, mostly from gas consumption, which would disproportionately affect high energy users in manufacturing, the groups argued Tuesday.
Speakers on the conference call said they don't believe the political will exists in the House to pass the measure, where similar legislation has failed repeatedly in the past. Pennsylvania Chamber of Business and Industry President Gene Barr said the organization's representatives have had "extensive discussions" with House leadership and rank-and-file members. He believes there's "already a lot of concern in the House over new energy taxes."
The rate of economic growth in Pennsylvania has fallen below the national average, and another tax on one of the state's leading industries would hamper its competitive edge and create a ripple effect throughout the rest of the economy, Barr said.
"We're coming back to competitive pressures here. That's what this comes down to. I am so sick and tired of hearing the argument that 'the industry is here, they can afford to pay a severance tax.' At the end of the day, what's affordability?" asked API-Pennsylvania’s Stephanie Catarino Wissman, executive director. "Nobody is listening to the economic realities, the price pressures that we are under as an industry...Capital is movable. All of our companies are looking at their portfolios and deciding where to invest their dollars."
Spigelmyer said that despite the cautious optimism pervading the Marcellus Shale this year, the Appalachian Basin is facing intense competition from other basins across the country, such as the Permian, where investments are soaring and activity has spiked. He cited Noble Energy Inc.'s recent decision to divest its Marcellus assets in favor of oilier ones in the Permian and elsewhere as an example.
Under the Senate's plan, producers would still be required to pay the state impact fee, which is levied annually on all unconventional wells during their first 15 years of operation, as long as they produce more than 90 Mcf. Producers have paid more than $1.2 billion in impact fees since they was established in 2012. But groups like the Pennsylvania Budget and Policy Center that have long advocated for a severance tax, argue that fee collections have declined in recent years as production has increased.
Wolf, along with other Democrats, urged House leadership to call lawmakers back into session to approve the Senate's revenue package or come up with a better plan. Democratic Rep. Paul Costa of Allegheny County said this week that each day the impasse drags on, it costs the state more money.
The Senate's package has also faced criticism from environmental groups for including industry concessions that lawmakers hope sweeten the deal for producers. The tax bill would implement faster turnaround times for well, air and earthmoving permits. Industry representatives said Tuesday they are not ready to make that trade-off. Spigelmyer said permit turnaround time in the state has in some cases reached 260 days for earth disturbance permits and more than 100 days for well permits.
"The problem is that [regulators] have yet to prove that they can process the permits in a reliable fashion," said Pennsylvania Independent Oil and Gas Association President Dan Weaver.
As the state works to fund the budget, the Pennsylvania Environmental Defense Foundation has already filed a lawsuit in the Commonwealth Court for a declaration that part of the budget is unconstitutional after the state Supreme Court ruled that royalties from the Oil and Gas Lease Fund cannot be transferred to cover general budget purposes and instead must be used for conservation.
"There will be challenges through the court systems, some of the environmental groups have already stated this. At the end of the day, it's not a trade," Weaver said of the permitting concessions included in the Senate's proposal. "From our association's standpoint, we're not going to trade for that because at the end of the day we see that component being thrown out and all you're left with is a tax."