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Severance Tax Talk Intensify as Legislature, New Governor Prepare for 2015

Governor-elect Tom Wolf campaigned on a five percent severance tax on natural gas extraction to raise $1 billion to fund schools and fill the state’s growing budget deficit – an idea that continues to split residents and business owners looking for any way possible to make ends meet without hurting their own bottom lines.

Last week, an Associated Press story said Wolf’s estimate – supported in August by the Pennsylvania Budget and Policy Center (PBPC) – assumes a wholesale price drillers can “only dream about.”  At current prices and production levels, a five percent severance tax could produce as little at $525 million, and as much as $675 million, the story noted.  PBPC this week said the tax could generate up to $881 million…still short of the needs for education funding, and the structural budget deficit, now pegged at almost $1.9 billion.

True impacts and revenue numbers remain in flux, but legislators have already begun circulating draft legislation on both sides of the issue.  Sen. Jim Brewster (D-Allegheny) announced legislation that would earmark revenue from a new natural gas extraction tax for public schools while retaining current well impact fees that support local governments.

Brewster estimated that his proposed five percent tax would generate between $700 million to $1 billion for public schools. The funds would be distributed via a new basic education subsidy formula that is now being developed by a bipartisan legislative commission.

Under his plan, shale drillers would be able to credit current impact fee expenses (Act 13 of 2012) against their severance tax liability. That way, the senator said the effective tax rate is five percent, which would keep the industry competitive. The current impact fee equates to an estimated 1.8 percent tax over the life of the well.

And State Rep. Kate Harper (R-Montgomery) on Thursday announced legislation to direct revenues toward public school employee pension costs. The Public School Employees’ Retirement System currently has an unfunded liability that exceeds $32 billion.

Rep. Harper’s proposal would assess a tax of 3.5 percent of the gross value of units severed at the wellhead.  She estimated the tax would generate more than $400 million annually.

Harper said, “My proposal strikes the appropriate balance between keeping this job-creating industry competitive and capitalizing on the opportunity to protect our school taxpayers from skyrocketing pension costs.”

The tax would be in addition to impact fees assessed on drilling under Act 13 which has generated more than $630 million to date.

Representatives of Associated Petroleum Industries of Pennsylvania, the Marcellus Shale Coalition and the PA Independent Oil and Gas Association Tuesday held a press conference to again express their opposition to a severance tax on natural gas production.

Dave Spigelmyer with the Marcellus Shale Coalition said attempts by the Wolf administration to raise $1 billion in revenue through a severance tax would “damage this play forever in the commonwealth.”

“There are opportunities for job growth, opportunities for a manufacturing renaissance,” said Spigelmyer. “All will create tax revenue for the commonwealth and I think that’s where the focus should be for the state.”

Newly elected State Senator Camera Bartolotta, on her Facebook page, summed up resistance of many elected officials from the Marcellus drilling area, noting, “I will fight, tirelessly, to keep the impact fee in place. $130 million dollars have come to municipalities that are impacted by drilling.  Money that we would not see otherwise is a huge benefit to our district.”

An analysis by Platts showed that oil and gas companies will profit even with a five percent tax at current sales prices. Regardless, numbers on both sides of the argument are likely to remain sketchy.

In the end, it may not be so much a questions of “if” the revenue estimates are accurate, but more so whether funding education and filling budget deficits via a severance tax is the right avenue for Pennsylvania’s long term plans.  But it has become obvious that even a severance tax is no silver bullet for the state’s budget problems.