ELEPHANT CORNER: Gas Severance Tax a Bad Deal for Pa.

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The severance-tax debate is rearing its head again.

Several lawmakers joined GOV. TOM WOLF to announce plans to push forward with legislation proposing a severance tax 4 to 7 cents per thousand cubic feet (MMCF) of natural gas, depending on the market price for the hydrocarbon. STATE SENS. JOHN YUDICHAK (D-Luzerne) and TOM KILLION (R-Chester), STATE REPS. BERNIE O’NEILL (R-Bucks) and JAKE WHEATLEY (D-Allegheny) are in the lead on this.

The bills, SB 1000 and HB 2253, are consistent with Wolf’s proposal put forward earlier this year in his budget. Wolf claims the tax would raise roughly $200 million in the next fiscal year. Proponents want the severance tax imposed on top of the current impact fee, which gas companies pay for each well they operate. The fee has generated more than $1 billion since it went into place several years ago. Most of the money is channeled back to the municipalities impacted by gas development.

As usual, the hue and cry of the proponents is that is levied on every major oil- and gas-producing state except Pennsylvania has such a tax. While this may be true, none of those states have the 9.9% state corporate-tax rate that Pennsylvania has.

A severance tax here continues to face opposition from Pennsylvania’s natural-gas industry and the legislature. The Senate had a severance-tax bill last year, but it had no prayer of getting through the more-conservative House of Representatives.

Killion’s district includes numerous municipalities where construction of the Mariner East pipeline is taking place. He said when lawmakers imposed an impact fee to send money to communities affected by drilling; they overlooked areas outside the gas fields where pipelines would be built to carry the gas to market. I dread to criticize a fellow Republican, but I think this is a little disingenuous. His constituents have been trying very hard to stop the construction of this pipeline, but he wants them compensated for something they are determined to stop.

There is one silver lining in both bills: Both contain language to reduce the bureaucracy the industry faces including a longer period of time to complete the drilling of a well, having a single application to apply to multiple wells so long as they are on the same well pad and permitting the drillers to vary the location slightly without filing a new application.

One should note that Killion and two other legislators that joined Wolf at the press conference are from areas where there are no shale gas wells or development. Yudichak is the only one who lives in shale country. So if this tax causes a reduction in gas-field development (and it will), it will not impact most constituents or local economies.

Based on data provided by the Pennsylvania Independent Fiscal office, the effective tax rate of the impact fee alone in 2018 is estimated to be 2.9%. At current market prices for Pennsylvania shale gas, the combination of the impact fee and the tax on average per MMCF would be almost 7% (on the lower end of the proposed sliding scale). This would be one of the highest severance-tax rates in the country.

Drilling rigs are mobile and taxes are a real cash expense to companies. If it is cheaper to operate in another jurisdiction, these companies will move. This would mean a reduction in potential tax revenues and loss of jobs.

West Virginia’s current severance tax is 5% and Ohio’s is effectively 1.3%, according to Natural Gas Intelligence. Both not only have lower current severance-tax rates but also lower effective state corporate income-tax rates. Ohio has a gross-receipts tax that effectively is lower than Pennsylvania 9.99% corporate income tax. Aside from a discussion of the potential economic problems caused by having the double-barreled effect of very high corporate and severance tax rates, is anyone bothered by the innate unfairness of taxing one industry so highly?

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