Primary 2014: Pa. Democrat hopefuls united for shale gas severance tax

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While they differ on the details, the Democratic candidates for governor are united in calling for a new severance tax to reap more revenue from the state's burgeoning natural gas industry.

Their ads depict the proposed levy as an overdue move to prod rich companies that can easily afford to share more of the wealth generated by the Marcellus Shale drilling. Gov. Tom Corbett has argued, on the other hand, that a steeper levy on the industry, beyond the impact fee enacted in 2012 with his administration's support, would risk driving away drillers.

Proponents argue that higher taxes are not just overdue but reasonable and vital to a state starved for revenue. That may well be so. But, in contrast to the impression projected by the 30-second ads, the effects of a severance tax may fall beyond the drilling companies. Unlike the existing impact fee, a proportion of a new severance tax could, under the language of most current leases, come from the landowners who have granted leases to the drillers.

Some communities that have come to rely on the revenue from the current impact fee are also wary of a change in the status quo.

Speaking at a Pennsylvania Association of Realtors conference on shale gas last month, Marvin Meteer, chairman of the board of supervisors at Wyalusing, Bradford County, said, "The Act 13 [impact fee] money is very important to us. It's making a difference. If we lose the impact fee -- and there's a lot of talk about creating a severance tax -- to us, that would be tragic."

According to StateImpactPa, Bradford County received the largest share of impact fee revenue in 2012 of any county in the state. Sixty percent of the fee goes to communities where drilling takes place. The balance goes to the state for regulatory enforcement and infrastructure projects.

The Democratic candidates have said that their tax proposals would address the needs of such communities in addition to yielding hundreds of millions of dollars for education and other purposes. But the details of how they would accomplish that remain to be determined.

Enactment of a severance tax, which would put Pennsylvania in the company of most of the other states with significant drilling activity, might not have to wait for the election of a Democratic governor. Despite Mr. Corbett's objections, a bipartisan group of legislators proposed such a levy last year, with a rate of 4.9 percent on the value of gas production. And with the state facing a revenue shortfall in the coming budget year, their arguments could become more compelling as the budget deadline gets closer.

State Treasurer Rob McCord has called for the severance tax with the highest rate -- 10 percent. He says he would "repeal and replace," the Act 13 impact fee legislation. Actually, that law specifies that the fee would go out of existence if a severance tax were enacted, although there would be nothing to prevent the Legislature from replacing it with an identical or modified tax, or with a portion of the revenue from a more lucrative severance tax. A spokesman for the treasurer said he would try to craft legislative language that would guarantee that landowners receive at least the minimum legal royalty payment of 12.5 percent, with safeguards against excessive company deductions from their checks.

U.S. Rep. Allyson Schwartz has called for a 5 percent severance tax and said that she would retain the substance of the current impact fee. Businessman Tom Wolf has also proposed a 5 percent severance rate.

Katie McGinty, who has particular experience on the issue as a former secretary of the Department of Environmental Protection, calls for a 4.5 percent severance rate on the value of gas, coupled with a separate charge calculated on the volume of gas produced. A spokesman said the two-tiered approach is designed as partial insurance against fluctuations in the price of gas. Ms. McGinty's plan also would retain the existing impact fee and shield landowners from a new tax.

The impact fee is a flat charge on each well drilled that can vary from year to year based on the overall price of natural gas. Unlike the severance tax proposals, it does not factor in the volume of gas produced at each site.

Kit Pettit, an attorney with the Pittsburgh firm Bernstein-Burkley, who has expertise in energy issues, said that if a severance tax were enacted, the landowners who have signed leases with the drillers would in most cases pay a proportional share of its cost, though he cautioned against generalizations because terms can vary with individual lease negotiations.

Allegheny County, for example, negotiated a lease for property surrounding Pittsburgh International Airport that specifies that any future severance tax could not be deducted from its royalties there. A proposed lease for drilling under the county's Deer Lakes Park, in contrast, is more typical in that a share of any new tax would come from its royalty payments there.

"Most leases have provisions that allow gas companies to pass through a severance tax on a proportionate basis," he said.

That means that if a landowner negotiated a royalty payment of 17 percent of the value of gas produced on his or her land -- a typical figure in the current market -- they would pay 17 percent of the tax liability.

Mr. Petit noted that it is conceivable that lawmakers could enact a severance tax with the provision that it would be levied exclusively on gas companies rather than landowners, as is the case with the current impact fee. But gas companies would factor in that cost as they negotiated new leases.

"One way or another, these are private businesses, they are going to find a way to make up for that fee," he said.

Mr. Corbett's oft-expressed warning is that higher taxes would drive drillers from the state. If the state's revenue demands became too great, that could well be the case, but severance tax proponents see lots of room between the current demands on the companies and a level so high that it would kill the golden goose.

Mr. Pettit said that of the 10 largest shale gas producing states, Pennsylvania is the only one that has not enacted a severance tax.

Politics editor James O'Toole: or 412-263-1562. Anya Litvak contributed.

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