As part of his $32.3 billion spending plan for fiscal year 2017-2018, Gov. Tom Wolf is counting on nearly $294 million from a 6.5 percent severance tax on natural gas extracts, less an impact fee credit.
Currently missing from that proposal: What it will look like and how it will be received.
According to budget briefing material, the impact fee credit can be taken for “the amount paid in unconventional gas well impact fee.” Essentially, this means allowing natural gas producers the ability to still pay the Act 13 local impact fee without penalty, but having to pay any additional revenue from the severing of natural gas at the 6.5 percent rate.
In subsequent years, the reliance on the severance tax as a revenue generator grows, with estimates of return coming in the amount of $441 million in FY 2018-2019, $528 million in FY 2019-2020, $596 million in FY 2020-2021, and $703.4 million in FY 2021-2022.
According to Budget Secretary Randy Albright, while the details of the plan need to be worked out with legislators, they are hoping to craft a plan that is fair to both the industry and taxpayers in a way that will provide budget relief so that other revenues can go to fund things like education.
“We want to work with them to put what we believe the best tax plan in place,” he said Tuesday. “It is not earmarked directly” to any specific fund. “We want to create an ongoing, recurring revenue stream that can support education need going forward, but if the tax is put in place for the ’17-’18 fiscal year, it would just go into the General Fund revenue.”
One important aspect of the tax is how natural gas producers will report production amounts and the tax owed.
Albright told reporters earlier this week that the current plan is to allow self-reporting; however, those details can be worked out and strengthened with legislative cooperation.
On that front, while some legislators – including Republicans – have introduced natural gas severance tax proposals already this session, leaders of the majority caucuses in the House and Senate widely panned the prospects of such a tax in response to the governor’s budget address.
“We think the impact fee works very, very well. It invests in our local communities that are actually impacted by the drilling themselves, invests in the environmental stewardship grants throughout the Commonwealth, and we’ve always been suspect of the numbers the Budget Secretary has put on a severance tax just given the state of the natural gas industry’s market price right now,” said House Majority Leader Dave Reed (R-Indiana).
“I think it would take a lot of convincing for us to actually believe the number associated with almost $300 million associated with a severance tax along with an impact fee associated with it. There’s a lot of moving parts there, but we have been suspect for a reason and mostly that’s because the natural gas industry just isn’t where it was six or seven years ago.”
Senate Majority Leader Jake Corman agreed, saying the caucus will not entertain taxes on job creators.
“When you see the natural gas industry reduce its investment in Pennsylvania over the years because of the marketplace, how adding a tax on top of that will incentivize more jobs and incentivize more investment in Pennsylvania is beyond my comprehension,” he said.
Pennsylvania is not the only place where natural gas producers have decreased their investment.
According to a 2016 report from the Energy Information Administration – an arm of the US Department of Energy – states that rely on a severance tax for fiscal stability have had to reevaluate their budget planning due to a decline in the fossil fuel industry.
Additionally, the Independent Fiscal Office, in evaluating current impact fee collections, noted a $50 million drop in collected amounts in calendar year 2016 from a high of over $225 million in 2013.
According to Wolf spokesperson JJ Abbott, the information the governor relied on in building out his estimates comes from a combination of HIS Global Insight historical and forecast price data and actual well and production data from the Department of Environmental Protection.
The budget briefing book provides some more insight into why the governor believes the revenue predicted in the budget proposal is not an off the wall projection.
“The buildout of infrastructure to move gas to the market will continue with the construction of pipelines, compressing stations and processing facilities,” the outlook reads.
However, they do note that most of the growth in the Marcellus Shale industry comes in the expansion of infrastructure to process gas from existing wells.
In that vein, the administration cites future growth in Pennsylvania’s natural gas industry attributable to the ethane cracker plant Royal Dutch Shell will build in Beaver County.
The natural gas industry also widely panned the proposal put forward by the governor, arguing that the industry in Pennsylvania is already in a state of decline.
“The governor and state lawmakers who are seeking again to impose a severance on natural gas production are ignoring a fundamental market reality with this ill-advised proposal: The low energy prices that people across the state are enjoying continue to translate into very difficult times for natural gas producers that would be made far worse with an additional tax burden," said Dan Weaver, the president and executive director of the Pennsylvania Independent Oil and Gas Association.
“This is the same market reality that existed during the last discussion about imposing an additional tax on natural gas production, and that will exist for the near future. This market reality means that a 6.5 percent severance tax rate would have a huge detrimental impact on natural gas development and jobs, while raising very little revenue to make even the slightest dent in Pennsylvania’s current and projected budget deficits."
The Pennsylvania branch of the American Petroleum Institute said the governor should focus on pipeline expansion and creation, which they said could help create jobs and bolster the impact fee, rather than a severance.
“Investing in pipeline projects throughout Pennsylvania would bolster the impact tax, allowing currently shut-in gas to get to market, thereby increasing tax collections,” said API-PA Executive Director Stephanie Catarino Wissman. “This way, all Pennsylvanians benefit by increased impact tax investments and the environmental benefits of increased natural gas usage.”
Jason Gottesman is the Harrisburg bureau chief for The PLS Reporter, a non-partisan, online news site devoted to covering Pennsylvania government.