Gov. Tom Wolf's proposal to impose a severance tax on Marcellus Shale natural gas production could yield hundreds of millions of dollars in extra revenue while prices are at rock bottom, because it would set a floor on the price at which the tax is calculated.
The proposal is key to the Democratic governor's bid to boost funding for pre-kindergarten programs and public schools by $2 billion over his four-year term. The pricing floor is believed to be unique among states that impose a severance tax on oil and gas production, and industry officials are pushing back.
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Prices are severely depressed by oversupply and a lack of pipelines to get gas to market, so gas is not selling for anywhere close to the proposed artificial minimum, they say.
Released earlier this month, Wolf's proposal calls for a 5 percent tax on the value of the natural gas pulled from the Marcellus Shale, plus a flat fee of 4.7 cents per unit of gas. The proposal would require the state Revenue Department to calculate the average market price every three months, no less than $2.97 per thousand cubic feet.
Drillers received an average of $2.65 per thousand cubic feet in the last six months of 2014, according to the research firm SNL Energy. At that price, their effective tax rate would have been 7.38 percent, with the price floor, versus 6.84 percent without the floor. With the price floor, their tax paid would have been $416 million; without the floor, it would have been $386 million.
Wolf's policy secretary, John Hanger, said the pricing floor was added to ensure a predictable level of funding for schools and for drilling communities that would receive a per-well allotment. In any case, he expects prices will average well above the pricing floor during the state government's next fiscal year beginning July 1, and that prices will rebound in the longer term.
"The current market conditions are the equivalent of distressed pricing," Hanger said. "These are not sustainable prices we're seeing. They're at the bottom of the market. There's only one place for prices to go from where they are today and it's up."
Still, industry officials say it would be unfair to make them pay a tax based on a price they are not receiving.
Wolf's proposal "totally ignores what's going on in the marketplace in Pennsylvania," said David Spigelmyer, president of the Marcellus Shale Coalition, an industry trade group. "You're talking excessive tax rates that are well above any other shale producing region in the U.S."
Gene Barr, president and CEO of the Pennsylvania Chamber of Business and Industry, likened it to an income tax that assumes every worker earns $100,000 per year.
"It makes no sense whatsoever," he said.
Hanger said the administration is willing to discuss and modify the proposal, if warranted. In any case, Wolf's severance tax plan faces an uncertain future in the Legislature, where the Republican majority is resisting the idea. Some of Wolf's Democratic allies in the Legislature expect that he will draw a line in the sand and demand a severance tax to boost education funding.
Pennsylvania remains the only major gas-producing state without a severance tax. The Wolf administration expects the tax would eventually raise more than $1 billion a year, significantly more than the state's existing "impact fee" on drillers, which generated $226 million in 2013 and is split between local governments and state agencies and programs.
It would also bar producers from deducting their severance tax liability from the royalties they pay to landowners, which Hanger described as a small step toward starting to address landowner complaints that drilling companies are unfairly deducting costs before they pay royalties.