Pennsylvania Republican lawmakers are maintaining a hardline stance against Gov. Tom Wolf’s Marcellus Shale severance tax proposal, saying they won’t discuss a tax until bills dealing with pensions and liquor privatization are settled. And with Mr. Wolf’s proposal to use a severance tax to reinvest in education being a campaign cornerstone, the stage is set for legislative horse trading this spring.
“Voters elected him, and Pennsylvania understands this issue,” said John Hanger, Mr. Wolf’s director of planning and policy. “We are interested in good faith negotiation and conversation about the details. But we need a drilling tax.”
Drew Crompton, chief of staff for state Sen. Joe Scarnati, R-Jefferson, the Senate president pro tempore said pensions must be dealt with first.
“We’re going to pick up the pension bill in April,” Mr. Crompton said. “Then we would be willing to talk about the need for new revenue.
“The problem with the budget proposal isn’t just the severance tax, but all the tax increases the governor is proposing,” Mr. Crompton said. Republicans make up the majority in both the state Senate and House of Representatives.
The severance tax proposal calls for a 5 percent tax on the value of the natural gas extracted from wells, 4.7 cents per thousand cubic feet (Mcf) on the volume of the natural gas, and a 5 percent tax on the value of natural gas liquids produced.
Mr. Wolf has said the proposal will raise $1 billion in its first full year, the lion’s share of which would be dedicated to education.
Drawing the ire of the natural gas industry is another feature of the governor’s plan — a $2.97/Mcf minimum value for shale gas produced in Pennsylvania, regardless of the actual sale price. Drillers wouldn’t be able to pass any extra cost on to landowners, according to the proposal.
In the Marcellus Shale region, natural gas prices have been depressed as pipeline capacity has not kept pace with surging production.
On March 20, natural gas traded at $2/Mcf at Dominion South Point, while natural gas at the Henry Hub — the national benchmark in Louisiana — sold for $2.80, according to Bloomberg data. Meanwhile, operators selling gas at the Leidy Hub in north-central Pennsylvania traded at $1.49.
“The severance tax is not much different than a sales tax — it should be based on what you’re actually paying,” Mr. Crompton said.
“You can’t negotiate when one side is asking for too much,” he said.
Steve Miskin, a spokesman for the House Republican majority, said the proposal is out of step with today’s market. “When natural gas prices are low, his tax hits its height,” Mr. Miskin said. “They arrived at $1 billion and they want to spend higher and higher to meet that goal.
”We’re not advocating for new taxes,“ Mr. Miskin said. ”If revenue is necessary, we believe it’s through liquor privatization and dealing with cost drivers.“
Kevin Sunday, spokesman for the Harrisburg-based Pennsylvania Chamber of Business and Industry, compared the inclusion of the $2.97 floor price as making someone making $40,000 a year pay income tax on $100,000.
“This proposal is much higher than the advertised 5 percent tax,” Mr. Sunday said.
Mr. Hanger said the proposed severance tax would take effect in 2016, “so the first day is still more than nine months away, and natural gas prices are at rock bottom levels. There’s only one place for it to go and that’s up. Current levels aren’t sustainable.”
For the first year of the tax, the proposal assumes gas prices will average $3.25, which wouldn’t trigger the floor price, Mr. Hanger said. “There’s precedence for pricing a floor for commodity that provide public improvement,” he said, noting that Act 89, which funds bridge and road repairs, includes a floor price for gasoline at $2.49.
The left-leaning Pennsylvania Budget and Policy Center believes the severance tax proposal is important to the regional development of the Marcellus Shale formation, which spans several states, said Michael Wood, research director.
Pennsylvania is the only major oil and gas producing state without a formal severance tax. Mr. Wolf’s proposal is modeled after West Virginia’s tax, but adds the $2.97/Mcf minimum.
Mr. Wood also said natural gas prices won’t stay low forever as demand increases and as companies prepare to enter new markets. The first exports of liquefied natural gas are expected to begin this year.
“The worry about low prices now is just an excuse to not pass this tax,” Mr. Wood said. “For the last seven or eight years, people have found excuses to not have the tax that other states levy. It’s past time to have this in place. The longer we wait, the more it harms Pennsylvania.”
Environmental advocacy group PennFuture also supports the proposal as it stands, which includes greater funding for regulatory and enforcement agencies. Robert Altenburg, director of the energy center for PennFuture, notes that staffing levels have fallen at the state Department of Environmental Protection.
“I don’t know if this will completely reverse that trend, but it’s headed in the right direction,” Mr. Altenburg said.
While the $2.97 minimum built into the proposal will make it difficult for drillers to plan their tax burden and will eat into profit margins, it’s not likely to drive drillers away from one of the most economical shale plays in North America, said Bill Holland senior reporter for SNL Energy, a trade publication.
“It’s shallow, it’s rich and it’s undeniably huge,” Mr. Holland said. Pennsylvania’s unconventional gas producers pulled more than 2 trillion cubic feet of gas out of the ground during the second half of 2014 alone, according to data released by the state Department of Environmental Protection.
“When the governor comes in, it’s part politics, part horse trading. He’s starting with a high hand,” Mr. Holland said. “But the governor will likely get the tax. It’s just too large to ignore.
“A severance tax is going to narrow the margins and make Pennsylvania less attractive, but where else are you going to go in this low price environment?”
Overall, the shale tax is popular with voters. According to a Franklin & Marshall poll in June 2012, 55 percent of Pennsylvania voters supported it, with another 18 percent “somewhat” favoring such a measure.
About 20 percent were opposed.
“Among independent polls, you might get different percentages depending on how the question is phrased, but you’re not seeing anything showing it’s unpopular,” said G. Terry Madonna, a political scientist and pollster at Franklin & Marshall in Lancaster. “For most people, it’s not a tax that they have to pay directly — not like an income tax.”
But the budget debates this spring are shaping up to be challenging.
With a Republican majority in both state houses, it will be difficult to deal with a severance tax “unless they reach some accommodation on pensions and liquor privatization,” Mr. Madonna said.
Stephanie Ritenbaugh: email@example.com or 412-263-4910