Pennsylvania's Democratic-controlled House has approved legislation (SB 1155) that would impose a 39 cents/Mcf (about 10%) severance tax on natural gas drilling in the state, despite assurances from members of the Republican-controlled Senate that they will not pass the bill.

The final House vote on the bill, taken late Wednesday afternoon, was 104-94. The bill must still be approved by the Senate and signed by Gov. Ed Rendell before it goes into effect. Originally, lawmakers had targeted an Oct. 1 finish line for the legilation with the severance tax to go into effect on Jan. 1.

Republican opponents said the bill's severance tax rate on natural gas drilling was too high. One Senate Republican proposal calls for a 1.5% tax for a well's first three years and then increasing to 5%.

"Watching the debate and what seems to be the final product coming over from the House raises serious red flags with us here on the issue of Marcellus Shale policy here in the Commonwealth," said Pennsylvania Senate President Pro Tem Joe Scarnati (R-Jefferson). "First and foremost, the process that the House has embarked on didn't involve at all consultation with the Senate to try to get a product that we can get to the goal line...we're not going to entertain a tax rate here in the Senate that's punitive to this industry."

The bill would send 40% of the revenue generated by the tax to Pennsylvania's general fund and the remaining 60% would be divided up among a variety of other items in the state's budget. The bill had originally called for 60% of the revenue to go to the general fund; legislation debated earlier this year could have sent as much as 90% of revenue to the general fund.

In addition to their concerns over the rate, some House Republicans had been reluctant to support a severance tax that would devote what they considered too much money to the general fund (see Daily GPI, Sept. 22). On Tuesday night the House approved 154-45 -- with votes for it coming from both sides of the aisle -- an amendment introduced by Rep. Kate Harper (R-Montgomery) that would shift some severance tax revenue to environmental causes, including 12% of the revenue going to the state's Environmental Stewardship Fund.

"[Democratic] members decided to support that Republican amendment," Johnna Pro, press secretary for Rep. Dwight Evans (D-Philadelphia), chairman of the House Appropriations Committee, told NGI. "I think it's fair to say that this is a first step, but it's an important first step. What's encouraging to us is through the debate [Tuesday] we were able to reach a compromise with Republicans in the House...so we're confident today that it will come out of the House with a bipartisan message and bipartisan support, and that bodes well for it as it arrives in the Senate, which is controlled by Republicans."

In the assembly debate Tuesday Republicans had labeled the previous House legislation, which would have sent 60% of the severance tax revenue to the general fund, as a mockery and a fraud in that its sponsors made no attempt to reach agreement with the Senate on a compromise bill (see Daily GPI, Sept. 29). "This bill would be dead on arrival in the Senate," one Republican assembly member said.

The House's proposed severance tax, which would go into effect Jan. 1, would produce about $120 million of revenue in fiscal year (FY) 2010-11 and $326 million of revenue in FY 2011-12, according to a House Appropriations Committee analysis of the measure.

The 39 cents/Mcf rate "shall never be less than the base rate," according to the legislation, which calls for an annual adjustment of the tax rate if 7% of the average New York Mercantile Exchange Henry Hub settled price is greater than 39 cents. The calculation of the adjustment would be 50% of the difference between 7% of the Nymex Henry Hub price and 39 cents and producers would be prohibited from recovering any portion of the tax from royalty owners.

The bill would exempt gas taken from stripper wells producing less than 60 Mcf/d, gas provided free of charge to surface owners or sold to surface owners for use in manufacturing, and coalbed methane.

While a $28 billion 2010-2011 state budget passed earlier this year by Pennsylvania legislators did not include a severance tax on natural gas production, budget negotiators agreed to such a tax in principle, and House and Senate members agreed to enact a severance tax by the end of this week (see Daily GPI, July 2). During the leadup to final negotiations on the tax, even Rendell appeared to have lost confidence that a deal would emerge (see Daily GPI, Sept. 10). The governor had been insistent on a plan he first proposed last year, which called for a 5% tax on sales, plus 4.7 cents/Mcf of gas extracted.

The 39 cents/Mcf tax rate would not crush Pennsylvania's natural gas industry and "is not, as some have claimed, the highest in the nation," according to analysts at the Pennsylvania Budget and Policy Center (PBPC). When taking into account property taxes paid by drillers in other energy-producing states -- but not levied in Pennsylvania -- the PBPC analysts found that "the effective tax rate in the House bill is lower than that in Montana, New Mexico and Wyoming."

Earlier this year a think tank said a tax of 30-35 cents/Mcf would be "more than competitive with other gas-producing states" (see Daily GPI, Sept. 3).

A severance tax on gas production would add to drilling companies' operating costs, but the revenue it would produce would yield positive results for Pennsylvania's economy and residents, according to researchers at Penn State's Institute for Research in Training & Development (see Daily GPI, Sept. 15).

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