The Tribune Democrat, Johnstown, PA

Local News

December 23, 2013

Is gold at end of the fracking rainbow?

State eyes natural gas tax

HARRISBURG — Talk of taxing natural gas is resurfacing as a bipartisan group of lawmakers urges another look at severance taxes amid warnings that the state is facing a deficit of $1 billion or more in the 2014-15 budget.

Pennsylvania is the only state with significant natural gas production that does not tax it. Instead, under a law passed in 2012, gas companies pay fees to local governments for the wells they drill.

The bid for a severance tax seems like a money grab by metropolitan lawmakers who are envious of the millions of dollars that pour into rural Pennsylvania through impact fees, said Sen. Gene Yaw, R-Lycoming, chairman of the Senate environmental resources committee.

Most of the shale gas drilling in the state is concentrated in northern and southwestern Pennsylvania. Yaw’s north-central district is the biggest recipient of impact fees, he said, getting about $85 million since the fees were created.

That money has paid for all sorts of things including extending water and sewer service, a YMCA in Lycoming County, housing programs, equipment for municipalities and repairs to county-owned bridges, he said.

Yaw fears that if the state were to replace the impact fee with a severance tax, there’s no way rural Pennsylvanians would continue to see the kind of money they’ve been getting.

“A severance tax would be a disaster for my district,” Yaw said.

The renewed push for a severance tax was announced by four state lawmakers – two Republicans and two Democrats. Three are from Philadelphia or its suburbs, and one is from Allegheny County.

State Rep. Pamela Delissio, D-Philadelphia, said that a 4.9 percent drilling tax on natural gas activity in the Marcellus Shale region would yield enough money to match the local impact fees.

“Had (the impact fee legislation) been waged fairly with bipartisan input, Pennsylvanians would have received more than $400 million in additional revenue since its enactment,” DeLissio said. “It’s time we bring forth a new plan that benefits all Pennsylvanians.”

Yaw said the drillers pay the impact fee even if they aren’t pumping gas from the wells. That’s a key point, Yaw said, considering that the Marcellus activity has contributed to a glut in the gas market, and many wells are not even being used.

A severance tax based on production would not get any money from those wells. The impact fee kicks in as soon as work starts on a well and continues for 15 years, regardless of how much or how little the well produces.

Initial estimates suggested the local impact fees would generate a total of about $100 million in the first year and up to $300 million by 2015. The impact fees actually provided $200 million in each of the first two years, Yaw said.

Pennsylvania collected impact fees on 5,324 wells in 2012, according to the Public Utility Commission.

That success is motivating the renewed discussion about a severance tax. But Yaw argues that if the money is divided across the commonwealth, it will not be enough to accomplish all of the things severance tax proponents claim.

“If you listen to them, a severance tax would solve all our problems,” Yaw said. “If your knee hurt, it would help.”

Gas companies pay $50,000 per well in the first year of impact fees. The fee diminishes until it expires after 15 years. Proponents of the severance tax note that it would provide stable funding long after the 15-year lifespan of the impact fees.

Rather than taxing the industry more, Yaw said Pennsylvania ought to be more aggressively working to develop a market for natural gas so that prices recover.

Pennsylvania natural gas production more than quadrupled from 2009 to 2011, placing it among the top 10 gas-producing states, according to the Energy Information Administration. The state was poised this year to become the country’s second-biggest natural gas producer, according to the EIA.

Pennsylvania’s emerging natural gas production comes as the state faces a looming budget crisis.

Budget Secretary Charles Zogby told reporters in a recent budget briefing that the Corbett administration anticipates a budget shortfall of $1.2 billion.

That shortfall is driven by $600 million in new pension costs and $900 million in added costs for welfare programs, including Medical Assistance, Zogby said.

Since Corbett took office, 2,788 state government jobs have been eliminated, Zogby said. Making additional cuts would be difficult, he said, adding that the state could soon be “cutting into bone.”

The Corbett administration has opposed a severance tax on gas drilling, and Zogby said that position has not changed.

The governor has preferred impact fees because they concentrate the money where the drilling takes place.

The Marcellus Shale Coalition, the largest lobbying organization for gas drillers in the state, noted a recent industry survey that found Pennsylvania to be considered an unattractive place to do business. The coalition said the biggest factors are the state’s taxes and environmental regulations.

Ohio and West Virginia both rank higher, according to the survey by the Canadian Frasier Institute. Both have severance taxes. Ohio collects $0.025 per 1,000 cubic feet of natural gas produced. West Virginia collects 5 percent of the gross value of gas produced, plus $0.047 per 1,000 cubic feet that goes to workman’s compensation debt, according to the National Conference of State Legislatures.

Opponents of a severance tax in Pennsylvania argue that the state’s corporate tax structure is already worse than those of many other states.

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