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Majority Leader Says Pennsylvania House Considering NatGas Severance Tax

A severance tax on unconventional natural gas production could be part of a final package to fund Pennsylvania's state budget, said House Majority Leader Dave Reed (R-Indiana County), but not if that package also includes gross receipts taxes for gas, electric and telephone utility customers.

"I think even our members who have support for a severance tax look at that through a perspective of the severance tax isn't the end-all be-all," he told reporters during a briefing at the state Capitol late last week. "Some of our members have actually introduced their own severance tax proposals. But I think even for some of them, they would be reluctant to use a severance tax to close a budget without some of the revenue options like gaming expansion or liquor privatization that our caucus has put on the table

“...Maybe that's part of the final package, but certainly not coupled with the gross receipts tax," he said, referring to the state Senate's proposal to implement a volumetric fee on shale gas production to generate an estimated $100 million and help plug the state’s more than $2 billion budget deficit.

The state passed a budget in July, but lawmakers have yet to agree on a plan to pay for it. In a narrow vote late last month, the Senate passed a revenue package that would require shale gas producers to pay an effective tax rate of two cents/Mcf on produced volumes in fiscal 2017-2018. 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 $400 million per year, mostly from gas consumption, which critics of the plan argue would disproportionately affect high energy users such as manufacturers.

Reed said the House has opposed a gross receipts tax for the last two years. He said lawmakers in the chamber are exploring a variety of alternatives to the Senate’s package and intend to “come back to the table with a counter” plan as soon as possible. The state treasurer has warned that Pennsylvania could run out of money by the end of the month if the legislature doesn’t act. But Reed said that since a budget that provides most of the revenue the state needs is in place, there’s more time to figure out how to balance the budget.

“Our hope is to resolve this sooner rather than later,” he said. “I would love to get that done before the end of August. I think that a lot of folks would like to get that done before the end of August. We just want to make sure that we get it right and not just do it for the sake of doing it.”

Pro-business groups warned last week that more energy taxes could erode the state’s economic advantages. Marcellus Shale Coalition President David Spigelmyer said his organization is taking the Senate’s vote “very, very seriously,” and said the industry can ill-afford a severance tax at a time of “extreme pricing pressure.”

Reed said the Republican-controlled House hopes to make progress on its proposals to privatize the state-run liquor system and generate more revenue by expanding gambling with video gaming terminals. The House also plans to review various state funds for other revenue this week.

“I don’t think it’s any secret that we’re not supportive of the revenue package that the Senate passed over,” Reed said. “We have had concerns, particularly about the gross receipts tax for a number of years now. We’ve been pretty open with concerns to the Senate, the administration and, quite frankly, I think the House Democrats have some concerns with the gross receipts tax as well.”

Under the Senate’s plan, producers would still be required to pay the state’s impact fee, which is levied annually on nearly all unconventional wells during their first 15 years of production. Producers have paid more than $1.2 billion in impact fees, which are collected for distribution to local communities and state agencies. Critics of the impact fee, however, maintain that production has increased while the fees have declined. Still, Reed said he doesn’t like that aspect of the proposal.

“They passed a gross receipts tax and I don’t think we’re likely to do that, either,” Reed said, when asked about the significance of the Senate’s vote to advance a severance tax. “At the end of the day, I particularly have some concerns with the Marcellus Shale severance tax that they passed. The fact that there’s no recognition for the impact fee dollars already paid is pretty disturbing.”

Lawmakers have tried, but failed for years to implement a severance tax in the state. Democratic Gov. Tom Wolf supports the tax; he’s proposed one three times since taking office in 2015. Senate lawmakers tried to sweeten the deal for the industry by including concessions that would require regulators to process well, air and earthmoving permits faster.

But the industry rejected that offer last week, telling reporters during a conference call at the time that there’s no willingness to accept a severance tax for quicker permitting because regulators can’t guarantee speedy approvals.

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