By Eric Boehm — Governor declares extraction tax bill dead, leaving $70 million budget hole. Industry was forecast to create 174,000 jobs and generate $1.4 billion in tax revenues by end of decade. House Democrats and Senate Republicans could not agree on a compromise.
HARRISBURG — Pennsylvania remains the only state among the nation’s 15 top natural gas producers not to impose a severance tax on the industry after Gov. Ed Rendell declared the bill dead Thursday.
Across the nation, 33 states levy severance taxes on the extraction of natural resources, but the tax proposed in Pennsylvania would have been unique.
A proposal which passed the state House in September but was not picked up by the Senate would have imposed the nation’s highest severance tax at 39 cents per thousand cubic feet of gas extracted, about a 10 percent tax given current prices.
Senate Republican leadership called the proposal “completely unacceptable” and pushed for a tax at 1.5 percent for the first three years, rising to 5 percent later.
They pointed to other major gas producing states – such as Arkansas, Texas, and Louisiana – which use a lower rate for a period ranging from three to 10 years to allow companies to recover their capital investments. Unlike the proposal in Pennsylvania, other states apply severance taxes to all industries which extract natural resources rather than only taxing one industry.
Mr. Rendell and House Democrats said the lower proposal was a gift to the industry. Attempts by the governor to bring the two sides together over the last few weeks failed.
Some states, such as Alaska, earmark the revenues from severance taxes for property tax relief, rather than placing it in the General Fund. In Pennsylvania, 81 percent of the revenues from the tax would have gone to the General Fund in the first year, with smaller portions marked for environmental funds and local governments in areas impacted by gas drilling.
Mr. Smith said the local and environmental issues were not the primary concern of lawmakers who drafted the passed the severance tax bill in the House last month.
“This bill was more about the government spending money than about the environmental impacts and the local impacts of the Marcellus drilling,” said Mr. Smith. He said the negotiations on the severance tax turned into “a feeding frenzy of government spending,” which missed the real value of the natural gas industry: providing jobs to Pennsylvanians.
Johnna Pro, spokesperson for House Appropriations Committee Chair Dwight Evans (D-Philadelphia), said the loss of severance tax revenues was another blow to the state budget.
“Ultimately, the people who will pay in the long run will be the people who get a property tax bill,” said Ms. Pro. “There will be no money to mitigate the environmental impact, and there will be no money to provide for local communities to repair their roads.”
Pennsylvania was counting on using $70 million in severance tax revenues to fill a budget hole when the state received $250 million less than was expected in a federal stimulus extension bill in August. The other $180 million was made up with program cuts and layoffs of state workers.
The severance tax revenues would have helped to close a small portion of a massive expected deficit, created by the upcoming loss of $2.3 billion in federal stimulus funds and higher public pension payments, said Gary Tuma, spokesperson for Mr. Rendell.
“Filling that large budget hole next year is going to require a lot of revenue from a lot of sources, and it would have been nice to have the money from the severance tax as part of that,” said Mr. Tuma.
Mr. Tuma said local governments with smaller budgets are already incurring costs from drilling infrastructure and were expecting a portion of the revenues from the severance tax to cover those expenses.
House Minority Leader Samuel Smith (R-Jefferson) said anyone who expected the severance tax to cure all of Pennsylvania’s fiscal problems was mistaken.
“It has an impact on next year’s budget, but we were going to have a bigger problem than that. What we really need to be doing is looking farther down the road,” said Mr. Smith. “What’s the best way to maximizing jobs in Pennsylvania with this industry instead of taxing them out of the state?”
According to a study from Penn State University, the natural gas industry in Pennsylvania will produce 174,000 jobs and tax revenues of more than $1.4 billion annually by the end of the decade.
If the severance tax is not passed before the end of the year, when Mr. Rendell leaves office, it may not be passed at all. Republican gubernatorial candidate Tom Corbett has repeatedly stated his opposition to a severance tax.
His Democratic opponent, Dan Onorato, said he did not agree with the severance tax passed by the state House, but he would support a reasonable tax on the industry.
Eric Boehm is a reporter for PA Independent. He can be reached at Eric@PAIndependent.com
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