Pennsylvania's $1 billion budget deficit could lead Corbett toward gas drilling severance tax

HARRISBURG -- As Gov. Tom Corbett heads into his final state budget before the election, a revenue shortfall of more than $1 billion appears to be wearing down his opposition to imposing a severance tax on Pennsylvania's natural gas industry.

Last week at a Capitol news conference, Mr. Corbett said he doesn't like the idea of a severance tax, but the opposition he expressed earlier in his term, when he instead favored a locally directed, per-well "impact" fee, might be giving way as Pennsylvania confronts a massive budget gap.

Without new revenue, the spending plan for the 2014-15 fiscal year would involve significant cuts to state programs.

"It's not a pretty picture, and we certainly don't want that," Mr. Corbett said.

At the same time, the Republican governor said he will not consider new or higher taxes until legislators send him a bill designed to reduce the state's costs for the pensions of future school and state workers.

As for revenue, Mr. Corbett's budget secretary, Charles Zogby, said the governor would rule out only increases in the sales and personal income tax rates.

So a tax on the extraction of natural gas, which the state bypassed in favor of a per-well impact fee directed mostly toward local communities, is on the table, potentially delivering on one of the most frequent demands of Democrats throughout the Corbett administration.

"I'm very pleased it's becoming more of a bipartisan conversation," said Sen. Jay Costa of Forest Hills, the Democratic leader. "With each passing day, there's greater support for the enactment of a Marcellus Shale tax."

While talk of a state tax on natural gas extraction is encouraging to Democrats, it could be deflating for Republicans and anti-tax hawks.

But it's a risk Mr. Corbett must examine. With public approval levels that have remained low as his bid for a second term heads toward the November election, it makes political sense for Mr. Corbett to compromise on his commitments against tax increases and for on-time budgets, said Terry Madonna, a professor of public affairs at Franklin & Marshall College.

For the first time in his 23 years of polling, Pennsylvania voters say education is their No. 1 issue, Mr. Madonna said.

"Getting the budgets done on time and no tax hikes was extremely important in 2010, but in 2014, the dynamic is don't cut services, increase education spending. So [Mr. Corbett] is faced between the proverbial rock and a hard place, and I think it makes political sense to violate the pledge if he in fact can get education spending, which is what he needs."

Senate Appropriations Chairman Jake Corman, R-Centre, said spending cuts and revenue increases are under consideration.

"Clearly, tobacco and severance are among the revenue options that people are considering," Mr. Corman said.

Pennsylvania's budget gap stems from months of the state collecting less revenue than expected and from a reduction in federal Medicaid reimbursements and costs from implementing the federal health care law, according to the governor's office.

Last week, the Independent Fiscal Office released revenue estimates for this year and the one beginning July 1, suggesting that the state will take in $1.44 billion less than the collections that were predicted in Mr. Corbett's February budget proposal.

Legislative Democrats, who have advocated for a severance tax, project a 5 percent levy would generate $500 million, on top of the about $200 million that the impact fee generates annually.

Tom Wolf, the Democratic nominee who will challenge Mr. Corbett in November, has likewise campaigned for a 5 percent tax and wrote to Mr. Corbett and legislators earlier this month to request they enact such a tax.

Mr. Corman said he believes an additional $250 million beyond the impact fee "would be about as high as you could get" in the upcoming year.

Republicans in the Senate and governor's office note that the revenues that could be gained from a severance tax depend on how the tax is crafted, when it takes effect and what is done with the impact fee, which is collected on a calendar year.

"Do you collect the impact fee from January 1 to June 30 and then start a severance tax? Do you go back to January 1 for a severance tax?" said Mr. Zogby, the governor's budget secretary. "All of these assumptions play into the amount of money you're potentially raising through a severance tax."

Drew Crompton, chief of staff for Senate President Pro Tem Joe Scarnati, R-Jefferson, said policymakers must take care not to dampen the economic benefit drilling can provide.

"Whatever we do, however we glean money from natural gas development, should not impair the economic development, the jobs, associated with the industry," Mr. Crompton said. "We're not going to be reckless in a way that will diminish economic development, whether we have a budget hole or not."

He credited a barrage of ads in the Democratic gubernatorial primary this spring with raising the political profile of the severance tax issue.

Sen. Ted Erickson, R-Delaware, a sponsor of legislation to enact a 4 percent severance tax, noted that most natural gas producing states have such a tax.

"I've talked to a number of members, and yes, there is support" for such a measure, Mr. Erickson said.

But a severance tax continues to face opposition in the more conservative House Republican caucus.

"If a severance tax were to come before us right now, a vast majority of our members would be opposed to it, absolutely" spokesman Steve Miskin said late last week. "In no way would we be advocating a new or increased tax."

Instead, House Republicans want to comb through the state's tax credits -- for instance, the film tax credit that has helped attract productions to Pittsburgh -- to tilt the budget toward balance.

The Marcellus Shale Coalition industry group says that raising taxes on drilling would suppress drilling activity and lead to fewer direct and industry-supported jobs in Pennsylvania.

"New energy taxes to fill a budget gap is short-sighted, will put Pennsylvania at a disadvantage when competing for capital investment and hamper economic growth at a time our state needs jobs most," Dave Spigelmyer, the group's president, said in a statement.

During his 2010 campaign, Mr. Corbett said that as governor he would not raise taxes. When he pushed for the transportation-funding package that became law last year, he argued that the major funding mechanism -- lifting a cap on the tax of wholesale gasoline -- would not violate that pledge.

Asked last week about the prospect of a severance tax, Mr. Zogby said Mr. Corbett wants to provide funding for K-12 education, higher education and human services.

In February, the governor proposed new spending for K-12 teacher training and curriculum development, higher education scholarships and services for people with intellectual disabilities, along with the first special-education funding increase in years.

"That's why he's willing to take a look at this, because those things are important to him," Mr. Zogby said.

Even in the House, Mr. Miskin said Republicans anticipate increasing spending on education.

Another source of revenue under consideration is adding to the tax on cigarettes or taxing other forms of tobacco.

An estimate from the House Democratic Appropriations Committee said a 10 cents additional tax on cigarettes could raise $59.6 million for next year's budget. Furthermore, a tax on smokeless tobacco and cigars -- neither of which are subject to state excise taxes in Pennsylvania -- could raise another $56 million, according to the estimate of House Democrats.

One potential drawback to a cigarette tax however, is that revenue available is estimated to decline over time as fewer people smoke. By the 2016-2017 fiscal year, a cigarette tax would only raise $56.6 million, according to the estimate of House Democrats.

Taxing cigarettes is sometimes considered a "regressive" tax, meaning it hits low-income individuals harder as it takes a larger percentage of their income than from more wealthy individuals.

However, such a tax can be "less regressive than many believe," according to a recent paper from the Center on Budget and Policy Priorities, which cited the health benefits -- reduced cigarette consumption -- and the potential end use of the funds as important to take into account when judging the idea overall.

"When you look at how the money [from the tax] is used, that matters," said Michael Wood, research director of the left-leaning Pennsylvania Budget and Policy Center.

Cigarettes in Pennsylvania are currently subject to a $1.60 per pack excise tax plus the state sales tax and a federal excise tax.

Karen Langley: or 717-787-2141 or on Twitter @karen_langley. Kate Giammarise: or 717-787-4254 or on Twitter @KateGiammarise.

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