Wolf unveils his plan for a $1 billion natural gas severance tax

Wolf unveils his plan for a $1 billion natural gas severance tax

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February 2015 Tom WolfGov. Tom Wolf has unveiled – at least in part – his plan to impose a severance tax on natural gas drilling in Pennsylvania that he said would generate $1 billion in new revenue, mostly for education.
As part of what Wolf called his “Educational Reinvestment Act” proposal, he said, “The tax I’m proposing … is modeled after the severance tax that’s levied in West Virginia … which is a 5-percent severance tax and a 4.7-cents per thousand cubic feet…on volume.”
“Together that would raise about $1 billion in the first full year, and the first full year would be, in my budget proposal, the 2017 fiscal year, because we would start this Jan. 1, 2016,” said Wolf during a morning press conference at Caln Elementary School, located in Thorndale, Chester County on Feb. 11.
“I’m not proposing anything here that is radically different from anything else – in fact it’s the same as what’s going on around us – and it puts us in a place where we can do some funding for our education system,” said Wolf.
But that’s not the case, says Drew Crompton, chief of staff and legal counsel to Senate President Pro Tem Joe Scarnati, R-Jefferson.
“West Virginia is considered by many to be the highest severance tax rate in the country,” said Crompton.
Crompton said rough calculations by the Senate Republican Caucus indicate Wolf’s plan would produce an effective tax rate of 8 percent to 9 percent on drilling, “which is at least four times the current impact fee rate, which is approximately 2 percent.”
“That would make Pennsylvania the highest tax rate in the nation – if that’s what they were after, I think they have achieved that,” said Crompton.
And if you’re experiencing a bit of déjà vu – for those who remember back to Gov. Ed Rendell’s attempts to get a severance tax – Wolf’s plan doesn’t appear to be much different from the one proposed in 2009 by Rendell, who was Wolf’s boss for a few years when Wolf was the state’s Revenue Secretary: a 5-percent tax on the value of gas at the wellhead, and a 4.7-cent tax per thousand cubic feet of volume extracted.
That plan, even with a state facing $3 billion to $4 billion budget deficits in consecutive years and legislative Democrats holding the majority in the state House of Representatives, could not win approval.
“I think the climate for passage of such a proposal is worse than in the Rendell days,” said Crompton, noting that in 2009 and 2010, no one knew what impact any tax might have on the development of the industry.
“This is tens of thousands of jobs that are at risk – we didn’t know how aggressive the industry would be back then,” said Crompton. “Now we know there are a sizable number of good-paying jobs.”
“That’s with a 2-percent-equivalent impact fee … and now we’re supposed to tell them they can go work in another state?” he said.
House Minority Leader Frank Dermody, D-Allegheny, who has considerably fewer votes in his caucus than his predecessor, former House Majority Leader Todd Eachus, D-Luzerne, did in 2009 and 2010, welcomed Wolf’s proposal.
“This is going to be a key issue as we work on closing the large structural budget deficit,” Dermody said in a press release. “Governor Wolf is following through on what he laid out in his campaign with a proposal to bring Pennsylvania into line with all the other states that already tax natural gas production.”
“No doubt there will be a lot of debate about this, but the governor’s plan provides a framework for the legislature to consider in the next few months,” added Dermody.
But Crompton said the Senate GOP Caucus might not be too interested in that debate.
“Look, if you want to consider whether we can garner more money from the impact fee, there might be ways of having that conversation – the problem is the conversation doesn’t get started when the price” of the tax “is so radically high,” said Crompton. “How do you get into a room with a guy who says he wants 9 percent?”
He said the Senate GOP would have a hard time getting past the “sticker shock” of Wolf’s proposal.