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Wolf Unveils Natural Gas Tax Proposal

This week, Gov. Tom Wolf announced his plan to seek higher taxes on Pennsylvania’s natural gas industry to help boost aid to public schools.  The Governor, kicking off a statewide “Schools that Teach” tour, appeared at Caln Elementary School in Chester County, and called for a five percent severance tax on the value of the gas, plus 4.7 cents per thousand cubic feet assessed on Marcellus Shale natural gas production.  He said the taxes would yield $1 billion a year and help restore funding to public schools. 

He said, “The tax I’m proposing … is modeled after the severance tax that’s levied in West Virginia.”  Wolf called the proposal the “Pennsylvania Education Reinvestment Act.”  Gov. Wolf reiterated that Pennsylvania is the only state with natural gas not currently imposing a severance tax and noted Ohio’s proposed severance tax of six percent. He stated the proposal provides protections for property owners who lease their land for natural gas extraction to prevent natural gas drillers from passing the tax through to them. Wolf said he would address many issues in his budget address but wanted to start by focusing on “investing smartly and adequately” in education.

Wolf noted that his proposed severance tax would not be on top of the existing state impact fee, which provides hundreds of millions of dollars for local governments.  “The lion’s share of this tax would go to education. Some of this would go to adequate oversight to ensure the drilling is done correctly and alternative energy development,” he said.

The industry opposes any tax increase.

But “The alternative is not really no tax,” Wolf said in a very direct tone. “The alternative is no drilling, a ban as in the case of New York.”

Marcellus Shale Coalition president David Spigelmyer issued the following statement on Governor Wolf’s new energy tax proposal unveiled today in Thorndale, Pennsylvania:

“Governor Wolf fails to acknowledge that the natural gas industry already pays significant taxes in Pennsylvania. Natural gas operators pay the same taxes that every other business in Pennsylvania pays, which has helped generate more than $2.1 billion through 2013.  Pennsylvania is the only state that imposes a special impact tax that will have generated nearly $830 million by April of this year, directly benefitting all 67 counties throughout the Commonwealth.  Pennsylvanians have realized more than $700 million in royalties from energy-development on public lands. By any measure, these are significant revenues that are boosting local communities, as well as important environmental programs.  More importantly, revenue estimates fail to account for the more than 200,000 hard-working Pennsylvanians who are employed by or support this industry and generate substantial revenue for the Commonwealth by paying their taxes.”  

“While we look forward to evaluating the policy details outlined by the Governor today, it’s clear that new energy taxes will discourage capital investment into the commonwealth and make Pennsylvania less competitive. Make no mistake, adding a five percent tax to any business sector – including the energy industry – is going to reduce capital spending and hit the supply chain, especially Pennsylvania-based small and mid-sized businesses, as well as our region’s labor and building trades.”

“Pennsylvanians are looking to their elected officials to help create new jobs, not new taxes, especially during these difficult and challenging times within an industry that has reduced energy costs for every consumer and been a bright spot for the Commonwealth’s economy.”

 “I’m not proposing anything here that is radically different from anything else – in fact it’s the same as what’s going on around us – and it puts us in a place where we can do some funding for our education system,” said Wolf.

Rough calculations by the Senate Republican Caucus indicate Wolf’s plan would produce an effective tax rate of eight to nine percent on drilling, “which is at least four times the current impact fee rate, which is approximately 2 percent.”

Senate Majority Leader Jake Corman (R- Centre) said pension reform is a more pressing matter.  “We repeatedly have said we cannot consider new revenue until we deal with pensions, which will have the effect of saving significant tax dollars,” Corman said in a statement. “We have a bucket that is leaking. It would be a misstep to persist at putting water in the bucket without first plugging the leak.”

House Majority Leader Dave Reed said, “While the governor’s 7.5 percent natural gas severance tax proposal should not surprise anyone, we all need to remember, there is no ‘free money.’

“By adding 4.7 cents for each 1,000 cubic feet on top of the 5 percent on the value of the gas, the governor is, in actuality, pushing roughly a 7.5 percent effective tax rate – one of the highest in the nation. In fact, of the top natural gas producing states, only Texas taxes at this rate, and comparatively, they don’t have a corporate tax like Pennsylvania. Unfortunately, the cost of doing business in Pennsylvania is one of the highest in the nation, and we have been working to reduce those costs and encourage job creators come to Pennsylvania. Increasing those costs might not be the best message,” he said.

Other Republicans in the House were more blunt, one saying the Governor’s proposal was simply “DOA.”

Gov. Ed Rendell had sought a similar level of taxes in 2009, in his attempt to balance the budget with new found money, but even facing a $3-4 billion deficit at the time, and with Democrats in charge of the state House, Rendell could not manage the vote for the proposal. 

Drew Crompton, Chief of Staff to Senate President Pro Tempore Joe Scarnati, said that Wolf agreeing to a Senate GOP pension plan could help get Republican senators “willing to engage in a conversation along these lines, but certainly not” on Wolf’s current severance tax proposal.  “If he’s not willing to budge on some things he doesn’t like, then I think it makes it even more unlikely we would have a conversation about this,” Crompton said. “But those things need to play out.”

“Gov. Wolf has heeded the call of Pennsylvanians, who strongly support a severance tax on natural gas drilling in the Keystone state,” said John Norbeck, acting president and CEO of PennFuture. “Pennsylvania is currently the largest natural gas-producing state without a severance tax, and it’s time that drillers pay their fair share. A portion of the tax will deal with the environmental impacts of drilling, an inherently industrial activity. We urge him to also apportion funding from this tax toward renewable energy and energy efficiency.”