As revenue talks drag on, natural gas tax fight heats up

With budget-related revenue negotiations likely to drag into the third week of the current standoff, the fight over whether a natural gas severance tax should be part of those discussions has continued to heat up.

Just as Republican leaders have been immovable in their stance toward bringing up any one of the numerous proposals introduced in either the House or Senate, one can hardly speak to a Democrat or moderate Republican in the Capitol without hearing about how such a tax – perhaps created in exchange for some regulatory relief for the natural gas industry – could be a primary solution to end the commonwealth’s revenue woes.

Such ongoing talk, particularly from some Republicans, was the motivation behind the Marcellus Shale Coalition sending a heated letter to House Republican and Democratic leaders arguing why such a tax is inappropriate.

"It is simply disingenuous for (severance tax supporters) to fail to acknowledge that Pennsylvania already has a tax on drillers – called the Impact Fee – which was enacted in 2012 and is levied on every unconventional natural gas producer in Pennsylvania," wrote coalition president David Spigelmyer.

"To date, Pennsylvania’s one-of-a-kind tax has generated more than $1.2 billion, benefitting every county in the state and making hundreds of millions of dollars in new investments in environmental programs like Growing Greener, the Marcellus Legacy Fund and water and sewer infrastructure," Spigelmyer continued

"In 2016, the tax on drillers was the equivalent of a 9.16 percent tax on production, translating into the highest effective rate of any state in the country that imposes a tax on drilling activity. The Impact Fee is paid on top of every other business tax levied in the Commonwealth, in a state long regarded by capital investors around the nation as one of the least competitive environments in which to do business.”

He added that due to increased competition from other gas plays, an onerous regulatory environment related to shale drilling and an already "uncompetitive tax climate" make further reliance on a severance tax as a way to close budget gaps an unstable source of revenue.

"Politically expedient policies that harm job creators, small business and consumers of natural gas are the problem, not the answer to an economically robust Commonwealth," Spigelmyer argued. "Rather, we need policies that foster production investment, facilitate efficient buildout of our infrastructure, and encourage and attract the unprecedented manufacturing opportunities that are presented with the use and development of the most affordable and abundant energy resource in the world – natural gas."

According to a January 2017 report from the Independent Fiscal Office, the effective tax rate on natural gas extractions – with the impact fee – is 5 percent.

Many of these arguments are not new in terms of the nearly decade-long dispute over implementing a straight severance tax, as opposed to the current impact fee.

However, they have not stopped supporters of the severance tax from reintroducing the concept year after year.

In fact, a severance tax has been offered by Gov. Tom Wolf in each of his first three budget proposals; most recently calling for a 6.5 percent severance tax with an impact fee credit.

Similar efforts have been found in the Legislature, and the calls for a severance tax have only increased as lawmakers seek to craft a revenue plan that provides an additional $2.2 billion to close out the recently concluded fiscal year and balance the current year’s $31.9 billion spending plan that lapsed into law last Tuesday.

Just last week, moderate House Republicans Rep. Gene DiGirolamo (R-Bucks) and Rep. Kate Harper (R-Montgomery) led the call to support a discharge resolution, a procedural maneuver that would move Rep. Harper’s severance tax proposal out of the House Environmental Resources and Energy Committee.

“The Commonwealth faces a budget crisis of anywhere from $1 billion to $2 billion. Surely a severance tax proposal should be on the table for discussion and a vote," Harper said last week. “The governor and the General Assembly have a duty and a goal of having a balanced budget in place each year that adequately funds essential government services for Pennsylvania. There has been no agreement on an acceptable source of funds to complete the budget this year. In short, this might help us get the budget done."

As recently as this Tuesday, Democratic leaders in both the House and Senate argued that should such a proposal reach the floor of either chamber – depending on how the tax was structured – it would likely pass, especially given the added pressure of Gov. Tom Wolf hoping for as much as $1 billion in new recurring revenue to avoid a forewarned credit downgrade by Standard and Poor’s and the likelihood of severe budget cuts and property tax increases should a revenue package not be agreed to in the near future.

“What has to happen is that (Republican leadership) needs to realize that the people of Pennsylvania overwhelmingly approve of a shale tax,” said House Minority Leader Frank Dermody (D-Allegheny). “They overwhelmingly want us to do our jobs here and that’s what has to happen.”

Senate Minority Leader Jay Costa (D-Allegheny) agreed that seeking a severance tax remains a worthy endeavor.

“It’s something we are going to pursue because the public supports it,” he said.

Rank-and-file House Democrats from the Philadelphia Delegation on Tuesday added their support to the House returning to voting session and including a severance tax as part of the revenue package.

"Pennsylvania has already given away more than $2 billion in potential revenue by writing the natural gas law to favor the industry and shortchanging Pennsylvania residents," said Rep. Donna Bullock (D-Philadelphia). "We simply want a severance tax comparable to the one every other natural gas-producing state in the nation has already put in place."

Meanwhile, the current state of revenue discussions has Republicans, particularly House Republicans, going the opposite way in terms of how to balance the state’s books.

On Tuesday, a revenue proposal crafted by House Speaker Mike Turzai (R-Allegheny) and presented on behalf of the House Republican Caucus to Senate counterparts included no new recurring sources of revenue and instead relied on borrowing, fund transfers, gaming expansion and further liquor privatization to close the most recently concluded and current budget years.

Senate Republicans are currently mulling the proposal, having sent their rank-and-file members home on Tuesday afternoon after returning to voting session for a brief two days in order to try and mark some progress in reaching a revenue deal.

Rumors of a four-party agreement on revenue, absent sign-off from House Republicans, were openly discussed Tuesday, but such a plan was said not to include a severance tax.

As it stands, Pennsylvania’s FY 2017-2018 state spending plan remains several hundred million dollars out of balance, leading to a host of legal questions and financial concerns until the issue becomes resolved.