January 26, 2017
Lawmakers and Gov. Tom Wolf are eyeing a new tax on Pennsylvania's shale gas industry as one way to address a $600 million-and-growing revenue shortfall--although any such proposal faces strong lobbying interests.
Wolf already vowed to include a severance tax in his Feb. 7 budget address. He'll have a menu of options to choose from as lawmakers from both parties bandied about a half-dozen ideas at the start of the new session.
"[Drillers are] paying this tax elsewhere and they're not loudly against it," said Rep. Kate Harper, a Montgomery County Republican, "but there are legislators who feel strongly on the subject, particularly if their home communities are benefiting from the jobs it produces."
Harper's proposal includes one of the lowest tax rates--3.5 percent at the well head--but preserves the state's existing impact fee. Proceeds from the new tax would be split between the mounting school pension obligation and state police services in rural communities.
Keeping the existing impact fee was a nod to the popularity of that revenue source, much of which funnels to counties and municipalities through the Public Utility Commission. In 2015, the last year available, it raised $187.7 million.
"I was careful to keep my rate competitive while keeping the impact fee," Harper said. "I sort of hit the sweet spot on this."
Some individual drillers privately concede that a severance tax is a cost of doing business but industry trade groups have kept such proposals at bay for nearly a decade through advertising and lobbying efforts.
"The economics of this play haven't changed a lot," said David Spigelmyer, president of the Marcellus Shale Coalition, one of the most influential lobbying forces in the state. In 2015 alone, it spent $3.8 million on those efforts, according to state records.
"We continue to educate the legislators directly," Spigelmyer said. "Our staff works the Capitol like many industries do to educate (lawmakers) on the taxes we already pay and to shine a light on the fact that there are projects already being funded through the impact fee passed in 2012."
The primary objection to a severance tax center on the downturn in the industry and the effect a tax increase could have on future investment. In recent years, a glut of new supply, difficulties transporting gas to market and larger global trends resulted in lower prices and fewer new wells coming online.
According to the U.S. Energy Information Administration, a federal agency under the Department of Energy that tracks production, the average spot price for natural gas was $2.50 per million BTUs in 2016. A recent forecast, however, called for prices to increase slightly, to $3.12, in the year ahead. It cited increased consumption at home as well as more foreign exports of liquefied natural gas.
"I'm optimistic the natural gas industry will do better in the future and, thus, be able to handle a bigger severance tax," Harper said.
That's a sentiment echoed by Rep. Mike Sturla, a Lancaster County Democrat who put forth a plan that would charge a variable tax rate, ranging from 4 percent to 9 percent, based on fluctuating gas prices.
Under Sturla's plan, the impact fee would remain in place but drillers could deduct both the impact fee and any capital costs before paying the new severance tax. Post-production costs could also be deducted up to 12.5 percent of the gross value for contracts with those who lease the land and may otherwise have to pay the costs.
"I think it takes away the argument that I'm going to kill the industry," he said. "When they make money, we make money."
Sturla said his plan also addresses the predicament with the fixed impact fee in which drillers pay a higher percentage of revenue when gas prices are lower and a lower percentage when the industry is booming. In this proposed system, he said, it's possible for drillers to pay nothing when times are tight.
Due to the lack of pipeline infrastructure to transport Pennsylvania's gas to market, he said state residents have enjoyed low heating prices. As several key pipeline projects are completed in the years ahead, including the Atlantic Sunrise pipeline that will traverse Lancaster and Lebanon counties, those prices are expected to increase.
"They're not going to keep the price at $1.10 (per million BTUs) when they're liquefying and shipping it overseas," Sturla said.
Regardless, Sturla said, Pennsylvania's growing budget deficit means a severance tax should be key part of the impending 2017-18 budget talks.
"We have exhausted our ability to say, 'let's do something instead of that'," he said. "There's really not much else we can do."
Harper and Sturla's proposals are just two of at least six currently making the rounds in Harrisburg. Others call for different tax rates or designate the revenue for certain uses, mainly for education and to satisfy the unfunded public pension liability.
The constant price fluctuations and the number of factors that help set that price complicate determining the financial impact of these various proposals.
In his first budget proposal, in 2015, Wolf proposed a 5 percent tax on natural gas with an additional 4.7 cents per thousand cubic feet of volume. He expected the tax package to bring the state $1 billion in revenue.
Last year, he eliminated that volume charge and increased the tax to 6.5 percent. That proposal was expected to bring in $218 million.
So far, it's not clear what shape Wolf's latest attempt at a severance tax will take or if he'll take any cues from the Legislature.
"At this point," Wolf spokesman J.J. Abbott said, "we can confirm that the budget proposal will have a severance tax but there are no further details yet."