Rendell eyes tax on natural gas wells
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HARRISBURG -- Faced with a revenue shortfall of $3 billion or more, Gov. Ed Rendell is searching for every shekel he can get.
So he's come up with an idea that would be new for Pennsylvania -- imposing a "severance tax," also called an extraction tax, on the huge amount of natural gas expected to be pumped from underground areas of Marcellus shale that stretch across the state.
It would be a two-part tax: 5 percent of the market value of the natural gas at the wellhead, plus 4.7 cents per thousand cubic feet of gas extracted. For the fiscal year that starts July 1, the governor is hoping the tax will generate $107 million, although that could fluctuate because the price of gas is volatile.
Opinion is divided on the new tax, which would take effect Oct. 1 if approved by the Legislature. Many Democrats and environmentalists like it, saying other states already have such levies. They urge using some of the money to fix any environmental damage caused by the drilling. But Republicans and business groups say there's something wrong when state officials want to whack a new golden goose just as it's starting to lay its eggs.
"The proposed severance fee for drilling for natural gas is long overdue," insists David Masur of PennEnvironment. "Drillers here have not had to pay a fee for extracting our natural resources."
Jan Jarrett of PennFuture, another environmental group, said the state's huge swath of Marcellus shale, containing perhaps 50 trillion cubic feet of natural gas, could make Pennsylvania "the Saudi Arabia of natural gas. Drillers should pay their fair share."
But the Commonwealth Foundation, a conservative think tank that's often at odds with Mr. Rendell, said that creating such a new levy would be "taxing an infant industry to death."
"Instead of seeing this as an opportunity to bring jobs and resources into Pennsylvania, [Mr. Rendell sees] a source of tax revenue to fill a massive state budget deficit caused by years of wasteful overspending," the group said.
With the two-part tax, there would be "a 33 percent income tax on each well's average cash flow, removing any incentive [for drillers] to continue operations in Pennsylvania," the foundation contended.
Two industry groups, the Pennsylvania Oil & Gas Association and the Independent Oil & Gas Association, are also critical. They represent hundreds of large and small companies in the natural gas and oil business, with more than 26,500 workers.
The average gas well now produces a profit of about 15 percent on investment, and the 5 percent tax that Mr. Rendell proposes "would amount to a full one-third income tax of each well's average cash flow," they complained.
The two groups said the price of natural gas has declined over the past year, making drilling less attractive economically and lowering revenue estimates.
The proposed severance tax, they claimed, "would impose a crippling tax burden that puts Pennsylvania at a competitive disadvantage."
But Revenue Department Deputy Secretary Dan Hassell said, "There is a tremendous amount of natural gas beneath Pennsylvania. I don't think these companies are going to walk away from that."
He said 28 other states now have a natural gas severance tax, and contended there should be "a public benefit [for Pennsylvanians] resulting from the removal of a nonrenewable resource" like natural gas.
He also said the proposed tax rates in Pennsylvania would be comparable to what West Virginia now uses. Opponents counter that energy companies are coming to Pennsylvania to avoid West Virginia's tax, and if Pennsylvania adopts its tax on natural gas, companies will drill in other states, such as New York, which doesn't have the tax.
But Michael Woods of the Pennsylvania Budget and Policy Center, a liberal group, argued that a severance tax won't "discourage the development of natural gas in [Pennsylvania] Marcellus shale."
What matters most for recovering the gas, he said, "will be the market price" and not a tax "that is paid in virtually every other major [gas] producing state."
Policy Center Director Sharon Ward concurred, noting the Rendell administration is trying to balance its budget in extremely tough times -- "a recession and a multi-billion-dollar shortfall." She said the severance tax is a way to "prevent cuts in education, health care for senior citizens and public safety."
As an alternative revenue-raiser, Republicans want to generate more leasing fees by opening up nearly 400,000 additional acres of state forest land for natural gas drilling. The state, last year, opened up 74,000 acres and received $190 million in lease fees, most of which Mr. Rendell wants to use to erase the budget deficit.
The severance tax revenue creates just a small part of how Mr. Rendell would balance his proposed $28.9 billion budget for fiscal 2009-10, which starts July 1. He would combine that money with changes to the state sales tax, cigarette tax and new tobacco taxes to generate nearly $500 million in additional revenue. The federal government is providing an additional $2 billion in Medicaid funds for low-income health care, and Mr. Rendell wants to take several hundred million dollars from the "Rainy Day" emergency reserve fund.
But he faces stiff resistance from legislative Republicans, who don't want to vote for any new or higher taxes or tap the Rainy Day Fund. The GOP-controlled Senate has approved and sent to the Democratic-controlled House a scaled-down budget of $27.3 billion, which calls for major spending cuts in welfare, education, health and economic development so that new or higher taxes won't be needed.
First Published May 25, 2009 12:00 am