Why Pennsylvania might finally pass a new natural gas tax this year
While President Trump is rolling back regulations in Washington and promising to side with energy companies across the country, Pennsylvania could this year start charging natural gas companies a tax on the gas they pull from the ground.
That’s even with a state legislature that’s the reddest it’s been in more than 50 years.
Today at the capitol, Gov. Tom Wolf, a Democrat, unveiled his 2017-18 budget proposal and it includes a 6.5 percent severance tax on the extraction of Marcellus Shale gas — a tax Wolf’s been talking about implementing since he ran for governor, and one that’s been twice shot down.
In conjunction a credit given to gas companies that have paid the impact fee, the tax would bring in an estimated $293 million in its first year and increasing to an estimated half a billion dollars by 2020. Wolf’s administration said it would use the funds “to generate new revenue to support future education investment while sustaining growth and maximizing economic gain from the commonwealth’s natural resource.”
Pennsylvania is the only major natural gas-producing state in the country that doesn’t tax natural gas drilling companies for what they extract. (Though natural gas production in Pennsylvania is gradually slowing, it remains one of the largest producers of natural gas in the country.)
In past years, some members of the state GOP have played ball and agreed to consider it, but a severance tax never got done. Stop us if you’ve heard this before: This year could be different. No, seriously.
This year, Wolf didn’t propose any broad-based tax increases as he has in years’ past (surely that has nothing to do with the fact that he’s up for reelection in 2018). A huge portion of Republicans in the state legislature ran on shutting down income and sales tax increases, so Wolf’s proposed budget avoiding those increases entirely will make things that much easier as he attempts to work with the GOP’s top brass on passing a budget.
While campaigning for governor in 2014, Wolf promised he’d enact a 5 percent tax on Marcellus Shale extraction plus an additional charge based on volume that would bring in $1 billion dollars in revenue. Two problems with that:
The tax did not happen in its first year, especially when coupled with other, broader tax increases Wolf proposed that led to a lengthy budget stalemate.
Projections show that the “billion dollars” figure could be off.
Still, Wolf once again proposed an extraction tax on natural gas drilling companies in his proposed budget the very next year. That time, it was a 6.5 percent extraction tax with no additional tax based on volume and, once again, it was proposed alongside additional tax increases and — though it would have brought in more than $200 million — was blocked by the GOP yet again.
While Pennsylvania is the only state that doesn’t levy an extraction tax, natural gas companies do pay what’s called an “impact fee” on every well they drill. The impact fee was enacted in 2012 under former Republican Governor/ energy company BFF Tom Corbett and in 2015, the impact fee brought in about $188 million, according to PennLive, but the vast majority of that went back to the municipalities where drilling was taking place.
Proponents of a severance tax have said revenue from natural gas companies drilling in the Marcellus Shale could triple if Pennsylvania enacted a severance tax as Wolf has proposed. And most of that cash would go to the state.
The left-leaning Pennsylvania Budget and Policy Center in December 2014 reported that switching from the impact fee to a severance tax — so a tax on how much gas is extracted as opposed to a tax per well — could yield an additional $400 million to $600 million or more a year in revenue. The Associated Press calculated a severance tax could bring in $675 million.
Any bill including a severance tax would likely include a clause forbidding natural gas companies from passing on the price of the severance tax to land owners they contract with.
Groups that lobby in favor of gas drilling companies disagree that a severance tax is the answer, natch. The PA Independent Oil and Gas Association says the industry already pays its fair share, including via a 9.99 percent corporate net income tax that’s one of the highest in America.
The Marcellus Shale Coalition released a statement Tuesday expressing its disappointment in the proposal.
“Instead of saddling the industry with higher costs,” the group wrote, “Governor Wolf and the General Assembly should work to advance solutions that serve to maximize the generational manufacturing opportunities and economic growth potential for Pennsylvania and its citizens.”
A handful of Republicans have come out in support of a severance tax on drilling companies and several have introduced their own bills to that effect. At the beginning of December, Kate Harper, R-Montgomery, gave notice that she’s introducing a bill that would combine the current impact fee with a 3.5 percent severance tax.
“The cost of meeting our obligations to public education and human services continue to challenge existing resources,” Harper wrote in the memo. “We should discuss and debate a severance tax before even considering raising income or sales taxes.”
Two other Republicans — Rep. James Santora, R-Delaware, and Sen. Robert Tomlinson, R-Bucks — intend to introduce bills that would levy a severance tax of 4 or 5 percent on natural gas drilling companies, according to NPR’s StateImpact.
Meanwhile, a number of Democrats have introduced their own bills providing for a severance tax in the range of 4 to 9 percent based on the volume of natural gas that’s extracted from the ground.
Clearly, there’s an appetite in Harrisburg to enact some sort of additional tax on the natural gas drilling industry. It’ll be up to GOP leaders to decide whether or not it gets held up once again. In 2015, party leaders in the legislature refused to discuss new revenue streams with Wolf until the the state’s massive pension deficit was addressed. At the time, liquor system modernization deals were holding up huge parts of the budget.